Does anyone know if the any of the 'great' traders such as: Soros, Simons, Cohen, or PTJ use leverage - if so how much? (note: VN excluded from great trader list - marketsufer's reaction: )
They all do, especially Soros. Futures are leveraged to begin with. Last year T. Boone Pickens personally earned 1.5 BILLION dollars from his Management fees for running his Hedge fund. He turned 1.5 Billion to 5.0 Billion in months.:eek: :eek:
If you were as good as Cohen at SAC or Simons at Rennesaince then you too could charge those kinds of fees. These are two long-term top-performing funds that have made handsome returns under very strict risk parameters. These guys can rightly charge whatever they want and they will have funds of funds, uhnwis, pension plans, institutional investors knocking down their doors. In fact those guys are probably turning away new clients and are closed to new investors outside their original pool. However, there are a LOT of underperforming hedge funds out there. Lots of them are closing down because they can't get alpha returns and it really showed (at least here in Japan) last month when the Nikkei/Japanese equity markets tumbled and it got really ugly for some. In the real world with so many funds out there, these days you have to be really good and have proven alpha gathering strategies with a solid pedigree and/or trading track record to get 2/20. There are some signs that too many funds chasing limited opportunities are driving down the fees that they can charge to even 1.5/20 or less.
Actually it's not obvious. You could always borrow 4 times your starting capital, so you get up to 5 times and invest it in the mutual fund to try to replicate the 40%, but then you will run into the fact that your personal borrowing costs are going to be at least ~7% (assuming your loan is secured by your property - ie you do a re-fi), so you're only going to net 8% on your equity capital and 4% on your debt capital for a sum of 12%. So if a hedge fund returns 40% on 5-1 leverage, you have to remember it's after all costs of funds. Also, the relevant statistic when it comes to comparing funds against funds should be return per unit of risk, or Sharpe. If the fund is 5 times more levered but produces only 2 times more risk than the mutual fund, it's a "better " investment than the mutual fund. Sharpe has a lot of weaknesses - but it is probably one of the better measures out there for general purposes.
That's his estimated earnings according to Alpha magazine. However its' not JUST from management fees. The management fees go to support his entire operation of traders, offices, support staff, legal & compliance support, shareholder communication, etc. His earning would have come from part of management fees, his portion of performance fees, and his return on his investment in his own fund. (He probably has billions of his own in their too...) According to Alpha Mag, two hedge fund managers made over $1B last year. I forgot who the second was... ah it was our friend Simons....
Look at the back of your ticket for an amusement park ride or a ski lift ticket -- says the same thing as one of these HF agreements -- that it's dangerous. Oh yeah -- That will really stop the lawyers dead when the wheels come off this one.
How about: "Unless you are a famous-billionaire-manager-purportedly-weaving-gold-from-straw, anything higher than 2/20 will get you laughed out of the room". -segv
Your investors can always sue you, just like your clients can always sue you in any other business. It is simply part of the risk. From what I understand, it is true that accredited investors have a harder time winning such litigation unless fraud is involved. -segv