Fund Managers

George Bernard Shaw . . . Quote: "Those who can, do; those who can’t, teach"

Does that apply to fund managers, "Those that can trade, trade; those that can't trade for others"

f they are able to make money trading other peoples money why don't they just trade for themselves?

(I'm not having a 'pop' at fund managers I really would like to know why)

 

Next question:
If you are trading and making money at it why don't you quit your day job and do it full time?

(again - a genuine question asked because I know someone asking themselves that question)

 

I am sure it applies to a lot of fund managers, as well as for many other occupations in finance.

However, if you are great at trading you can make x USD trading your own account. If you run a fund and manage the same return your gain will be x + y USD. Your capital will be a lot higher, and you will get paid for a part of the return of the capital that is not yours as well as whatever you put in.

Just look at Warren Buffet. He has hardly made 10 % annual return since the 90s. But, since he has kept at it for so long, and have had the responsibilities of a lot of other peoples money as well he became the richest in the world for a while. If he had only traded his own money, you would most likely never have heard about him. He would of course been rich. But probably only "Omaha-rich" and not "global-rich".

 

For your second question, I can guarantee that trading part time and trading full-time is two very different things.

First of all, if it is full-time, you need to pay bills with the return. That means you need to take money out from your trading account. And, especially if you have a slump, and see that you need money to pay a bill, you might start doing stupid stuff pretty fast.

So do not under any circumstances quit your day job unless you have a few years expenses worth in the bank that you can use, or a wife that is happy to pay all the bills for a year or two....

 

Most fund managers have a significant part of their wealth tied up in their fund. Usually the seed stage is 100% fund managers assets, after which they can start raising capital from friends & family, and finally, from institutional investors.

What you should understand is that the once you become skilled at trading, it is no longer really about the money. It's about the game. And to play the game, you need at least 250MM (if cash equities only -- 1.5B if you like derivs). Once you get good at the game, you then move on to creating an institution (legacy).

 

Not necessarily. There are some fund managers who really are good at trading and are willing to trade for others. The guy in "Big Short" is pretty good. And so is Warren Buffett who also trades for others. George Soros is another one.

 

Some and many do.

 

Pretty easy. You can make a lot more money trading for a fund. How many multi millionaire fund managers are there? How many multi millionaire retail traders are on elitetrader?

 

I will assume this is a genuine and serious question and will answer it as I make a living as a trader and have also been a "fund manager".

The skills required are basically the same and there are brilliant traders in the fund management industry as of course in the "retail" industry, even though in the latter there are very few public records.

So while the skills are more or less the same, what is massively different is the operational framework; retail traders have no regulatory, legal, fiduciary or other responsibilities. Investment managers do and the burden has increased dramatically in the last 10 years.

A decent portfolio manager will definitely be making more money "on average" at an investment manager rather on their own. The reason is simple: The assets under management are big and the fees accumulate. So for example, let's say said pm makes $300k per annum at the fund they manage, to make the same amount on the retail side, they'll need to return 30% on a $1,000,000 account. Not easy.

My experience in the last 20 years has shown me that the "average" professional pm a) is infinitely better off staying at their job and b) are better than the "average" retail trader. Yes, there are exceptions out there (read jack schwager's latest book for example) but these people and a few others are very few and far between. Most retail traders cannot trade for a living and are very deluded about the demands of the job.

 

I have never been a true retail trader, but I had a stretch of downtime (was in a hospital for 6 months and had to deal with boredom) when I traded for myself. In my opinion, there are a lot of considerations that come into play.

(a) As a fund PM it's much easier to get paid a lot of money because of access to capital. For example, if a PM is getting 12% of PnL net of costs and can make 10% return on capital, he would need to manage a measly 100mm to get paid a ~$1mm. As a private trader, he'd need to have at least 10 million in his account. Unless a PM had the right parents or won a lottery, it's a LNW number that can only be hit at the tail end of the career.

(b) There are a lot of types of trading that require institutional infrastructure that is pretty hard to get as a retail trader. This said, it's certainly has been getting easier over the recent years and there is a fair number of "independents" who run strategies that are very similar to that of institutions.

(c) Skillset is somewhat different and returns would be much worse for an institutional PM. It is infinitely easier to make good return on capital as a retail trader than an institutional guy. E.g. there are plenty of specialized capacity-constrained trades that would produce 25-35% per year on $1mm, but usually impossible to scale that up. If you a managing a few hundred, you gonna end up thinking about impact, about crowding etc, stuff that a retail trader would rarely consider.

(d) Its undoubted that a median institutional trading is a better at generating PnL than a median retail trader. It simply comes from better training and knowledge base. However, a retail trader is not burdened by compliance, restricted mandate or onerous risk checks - she's also not required to run stuff at a certain capacity all the time.

(e) Finally, you have to realize that most funds would have a prop book as well. That means if a fund manager or a PM has a strategy/trade idea that's too good to share, he'd put it in the prop book. Not very ethical, but certainly not illegal.