A Fund vs. Your Own Money

Hi Smoker,

That's exactly what I do since September: build a quasi-fund of several investors (mostly friends who understand what trading is about, who understand particularly my own trading and are OK with all parameters of my typical risk-profile/equity curve). So far haven't reached the liquidity borders, but look forward to do that and guess there will be some ways to scale it up then in which case even somewhat lower % performance will be compensated by the turnover. In theory at least.

 

I assume your mates are not the super rich so I hope your liquidity issue is still quite a way down the road.

Have you spoken to your FCM/broker about the possibility of shopping your track record around to the international asset allocators?

Your FCM runs their risk management algorithms every day on your account and if you say its ok it they can pass those reports on to the asset allocators.

Then if you pass being plugged into the Asset Allocators risk/reword models and can handle size and pass due diligence who knows what the future could hold!

All the best with your new venture!

Cheers Smoker

PS just noticed I signed off as Sandman in my reply to you which is my handle on a Middle East 4x4 off road message board.

I just got back from Greece and haven't been out off road in the Empty Quarter for a while and my subconscious is missing the dune bashing. Sorry about the confusion. Cheers Smoker

 

Thanks Smoker!

No, not super-rich, but I basically scalp the market so every tick matters and the current bid/ask offered is quite critical liquidity wise. Still quite down the road indeed.

That's good idea you have about communicating with the broker on the matter.

Currently my plan is run it as it is for a few more months with just those several friends being investors... maybe allow a couple more people to join and see how everything goes (and grows ). Going to analyse everything in the process and choose optimal ways for further growth of the business.

 

Nobody mentioned the fact that even with 20% ROI as retail, in contrast to a regular "stiff" job, as a trader you have unlimited potential forward. In other types of jobs you get promoted, maybe you make it to a management position one day, but that's it, there's a cieling. In trading, promotion is like getting more capital, and with a few years of 20% ROI you can surely attract it. The difference is, there is no cieling unless you have a liquidity constrained strategy but even most of these can take at least a few dozen million before saturating. To me, this potential for progress is a vital motivator compared to regular jobs, plus I like innovating.

 

A regular job doesn't require any investment and has a lot less personal risk, plus you might get to work on cooler or more meaningful things.

I think too many people under-estimate the risk of trading your own capital. I'm not saying one is better than the other, but I can see the argument for taking employment.

Depending on your opportunity set, a job can be better than even a professional wall street career.

The quant research guys I used to work with told me that they felt working on wall street was worse than being a tenured professor. But the immediate gratification of being on wall street vs fighting for tenure was what drove their decision and about 1/2 regretted it and 1/2 didn't.

 

I think "regular job" vs. trading on your own is eternal argument of "regular job" vs. your own business (of any kind).

All comes down to personality traits. Those who prefer security in exchange for limited potential usually prefer regular job somewhere, preferably in the large corporation with many social benefits etc.

On the other side people who are ready to risk in exchange for unlimited potential and freedom to commit decisions choose the path of running their own business and while retail trading is not business in the strict sense of the word, there are many similarities.

 

Smoker,
I know of several independent traders who made millions, and I am sure Don Bright would be happy to point out that he knows a lot. However, you are correct that if you want to make tens or hundreds of millions then a large fund is the only way to do that. You basically answered your own question, and I feel the exact same way, when you wrote that you are more aggressive with your own money. The psychological and risk parameters are different when you are trading only your own money with no one to answer to about anything ever vs. having every single thing you do constantly examined and scrutinized when running a fund. I don't remember the link, but as with most trading related issues I was assuming it was more anecdotal than scientific, but I remember thinking the article matched quite well with my couple decades of experience and dealing with a few thousand traders.

Cornixforex,
Making over 50% a year when you are a high leverage day trader is possible if you are good, but then there is no reason to start a large fund because you won't be able to scale it. You can scalp a few hundred ES with your own money but try scalping ten thousand. Even a small 250 million hedge fund would do fifty thousand ES contracts using CME overnight margin - have fun trying to scalp that. Making a high rate of return on a few hundred thousand or a few million of your own money has no comparison to trading a fund with hundreds of millions. With all the new regulations the new perceived minimum for a standard hedge fund to bother opening its doors is 150 million AUM. It costs a lot to have the right offices, people, and legal protections in place now days. There are plenty of guys out there who think they can have a small fund and do fine, but you will eventually have a time when the 2% management fee is all you have for the year and that does not add up to much for a small fund. The guys who have funds without serious professionals with regard to risk management, accounting, marketing, legal, and compliance are just hoping to get lucky and not have problems.

 

Absolutely agree, for my style small private quasi-fund of size up to 7 figures or so is the realistic goal, hardly more (based on my knowledge of current liquidity of the instrument I trade).

To scale up seriously to the numbers you gave strategy should be adjusted towards longer-term style which inevitably would decrease ROI.

 

great post...

 

Hi cornixforex,

You know I keep saying this to people on this board that think they are at, or closing in on their strategies liquidity restraints but think of your edge as less of a scalping set up and more of a methodology and it might be a lot more scalable that you currently realize.

I cut my teeth in the 80s in FX interbank market making and then options market making on the CME. Along with market making I used to scalp futures and day trade futures throughout the day as opportunities appeared.

Later when I went into money management my first CTA mentor who hired me as a short term swing guy to supplement his long term trend following angle convinced me to systemize my setups into an algorithm and test them in longer time frames.

It worked out ok and then years later when the floors started to die and high frequency came along my programmer took my swing/day/long term stuff and brought it into high frequency time frame.

So think about trying the same with your scalping set ups and you might get a pleasant surprise and suddenly that liquidity issue disappears over the horizon.

At this point in my trading career unless some idea works all along the time line I drop it since working every where and across most markets is one of my personal litmus tests for robustness.

Anyway it’s just a suggestion?

Just to be clear I didn’t mean talk to your retail broker who handles your account since he will just hook you up with some of his other retail clients and the car dealer down the road etc.

What you want to do is talk to the FCM institutional desk which handles the big CTAs/Hedge Funds etc. If you have the numbers etc and your track record passes their risk/reward algorithms they are the guys that will pass the reports relating to you onto the institutional asset allocators to see it there is any interest in your profile.

As far as I am aware this is the way that most independent traders get discovered verses coming out of an investment bank prop group or international bank treasury etc.

Best of luck!

This is true but it depends on your personal definition of “unlimited potential forward”.

For example, back in the 80s a floor scalper on the Merc once said to me that career happiness is being self employed with no clients and no employees. So for him being a successful but modest scalper making a good living but not holding any over night positions or doing horse and pony shows to raise money etc was as big as he wanted to get (at the time).

This guys ambition verses someone with a more competitive nature that isn’t satisfied making a good living as an independent scalper so they more or less “institutionalize” themselves by either joining an institution or creating their own hedge fund/CTA so they can leverage their edge and complete at the highest level.

To get to the “unlimited potential level” you really need to tap into OPM.

As an ironic aside the above scalper ended up in the 1990s leaving the floor and doing a career 180 and for years has been running a very successful CTA with dozens of employees and institutional clients.

I haven’t spoke with him for years but have to wonder if he is happier today making millions per year verses cranking out 200k a year on the floor (which was a pretty sweet annual income in the 80s)?

With such personal success I am assuming these guys popped up on the radar of their FCM/broker’s risk/return algorithms so with such a fantastic track record must have got shopped to the international asset allocators; so do you have any idea why they turned down an asset allocation to the “show”?

Sorry I sitting offshore in the sandbox I am a bit out of the mainstream of the elitetrader world and I haven’t heard of Don Bright so had to Google him.

Isn’t this guy the type of dude that does retail seminars on “how to make a million” rather than one of the international asset allocators running an seeding program for emerging hedge funds etc? How does he know all these independent traders that have become millionaires trading out of their house?

Also I asked earlier what kind of entity are people on this forum referring to when they say “prop” firm?

Is a “prop” firm a hedge fund/CTA running serious wedge or is it an entity like this Don Bright Trading that gives retail trading seminars, retail brokerage services etc?

Is this Don Bright the kind of guy stateside that offers stuff like that 1:1 deal that cornixforex was talking about?

Yes but there is a very important but subtle difference between what each of us said.

You said:

I think it is normal to be equal at both since methodology is methodology even if leverage is not leverage.

While I said:

I am more aggressive with my own money verses the institutional allocation but successful with both because the method thus signals are the same etc and the only difference is my personal risk profile is different than the institution.

If the institution had the same risk profile as my personal risk profile their performance would line up with my personal account.

That said in the interest in full disclosure I stopped trading my own account several years ago because I felt I was already over exposed to my edge from the performance fee on the allocation. So in the interest of diversification I divvied my personal cash up between several hedge funds/CTAS I know in the business in the interest of getting some exposure to a bunch of other guy’s expertise.

And for icing on the cake two of them are running my cash far hotter than I emotionally can deal with which makes looking at the performance reports at the end of the year kind of exciting (only look at the statements once a year and it minimizes the temptation to interfere).

All the best,

Cheers Smoker