How Do You Get Paid to Lose Someone Else's Money...

Discussion in 'Professional Trading' started by retaildaytrader, Aug 25, 2010.

  1. I see many of these so called "fund managers" out there who seem to deal out a humble return if not an outright loss...yet so many people keep coming back to them. For example, Doug Kass at Seabreeze Partners. Doug is basically like a coinflip per his Twitter record...

    How do people keep coming back to Doug with their money seeing his coin-flip like trading skills?

    If I had this type of charisma, then I would not be trading but instead selling the Brooklyn Bridge.
  2. RE: How Do You Get Paid to Lose Someone Else's Money...

    Perhaps you can ask your buddy Aaron at Schindler Trading.
  3. Roark


  4. LeeD


    There are 2 points here. First, fund managers that loose money keep being paid because they have running costs. They hire staff, lease an office etc. So, these running costs have to be covered before a fund can start functioning. If the fund manager has a large chunk of his or her own wealth invested in the fund this goes a long way towards reassuring investors.

    Another, more interesting point is how can hedge funds grow capital under management even though they generate negative return year after year?

    A few years back I was connected to a hedge fund that specialised in a narrow area with just a dozen of competing funds. Using a hedge fund database I compared the performance of the competing funds and their funds under management. What I discovered was quite stunning. The 3 largest funds lost money year after year. The biggest one actually made money in only 2 out of 7 years it was out there with a annualised average return close to negative 10%. At the same time, the best-performing fund (they had Sharpe Ratio 6 and never lost money for more than 2 months in consequitive 12 months) had only 50mln under management without any indication of growth.

    You may ask "how is it possible? do prospective investors not look at the history of returns at all?" The secret is while the best-performing fund was "independent", the 3 largest funds that kept loosing investors' money year after year were propped up by 2 large banks and one gigantic fund management company (that ran a few dozen funds). Naturally, the bank sales people marketed the funds to their clients for the share in the commission.

  5. Welcome to the world of the BIG con.
  6. Jst511


    Another huge problem is the way funds of funds decide to fund new and emerging managers. I have been told by a few guys who work at a fund of funds that most of the heads of dept would rather give funding to a guy with a MBA from a top 10 school with minimal trading experience than a guy who came straight out of an average college with no MBA but put up great trading returns for several years. This is partly to cover their asses in respect to investors questioning education level. However, when it comes to trading experience should trump all.
  7. LeeD


    They also (possibly falsely) assume that an MBA graduate knows more about fundamental analysis and how to get info out of companys' management than a "typical" successful trader.

    When looked from a different angle it's a very interesting observation. Larger hedge funds tend to hire folks with fancy degrees from top schools (to show investors that they pic the "top" talent) but very few fund managers fit this profile themselves.

    Also funds of funds look at hedge funds they invest into as businesses. Most hedge funds are more than just a single trader working from his or her home or small office. They employ analysts, traders, accounting firms, often lease an office in the expensive part of town... The most common reason for new businesses to fail is the failure to cover expenses early on. Hence, it's a big asset to have on the team someone with experience of running a business of a similar size or, at least, with a relevant degree.
  8. If you have "great trading results for years" then believe me, someone is going to take notice. Just go to the "Journals" section and post up a thread of your calls along with the brokerage receipts for 3 months. If you get great trading results, then someone is going to PM you. Throw up a blog or get on one of those popular blogs and do the same thing...again you will find an email pop into your box from somewhere.

    The thing is that very very few people here can actually do that. They can make a good call or two or even get on a short winning streak, but 99% will surely not be able to last over time. I challenge anyone here to post up a journal for 3 months demonstrating their "great trading results". You will probably start out ok and then the journal closes in less then 30 days.

    What it comes down to is charisma, illusion and putting up a good show. No one out there is great at trading except the lucky few and those with talent are quickly put under non-disclosure agreements whisked away from Elitetrader or any board forever.
  9. Nobody with significant money is going to care about "3 months"... "years" is another matter... and it may take 3 or 4.

    Everyone will be a skeptic until they finally cave and say, "OK, OK, I believe".

    It's difficult to break into the world of money management if you're an unknown, independent. You'll only survive if in fact, you are good.

    Years ago I participated in the "U.S. Investing Championships" (3 years, plus 2 more years in MMVR). They published the top 20 or so each year in Barrons and IBD. There were about 5 or 6 names which showed up on that list year after year. Those are the ones who attracted OPM to manage.
  10. Jst511


    exactly unless your trading results are verified and tracked by way of a shell company... good luck getting any sort of major funding from a fund of funds where you would receive any sort of managment fee. Perhaps if you posted or emailed your results to a other fund managers they might take a shot and throw a few mill your way without the caveat of receiving a managment fees. This solely allows one looking to break into the industry to finally be tracked trading a sizeable account.

    I don't know of anyone being wisked away from elitetrader nor would expect that to occur. Thoes that do have tallent are profitable but typically take a much different route than magically becoming a fund manager overnight. The successful guys I know have traded a funded prop account for several years and then are tracked under a seperate LLC posting decent returns until they are funded well enough that they can actually be considered a true hedge fund.

    However the title of this post was how to get paid to lose someone elses money. Its just sad that the guys that typically lose money are the least experienced ones. While the most successful ones need to jump through every hoop possible until they finally catch a break although. There are way to many guys whom I know that are collecting a 200k-400k a year managment fees and barely breaking 2-3% a year in returns for their client.

    Just think about the risk reward and how managers are tracked. They are tracked by way of the S&P and just mearly beating that. Any decent trader easily can beat the market if they cant they shouldnt be trading. Secondly the way funds are tracked actually hurt short based funds because if the market goes up by 3% and your short and only lose 1% you considered to be off by 4%. However if your fund is mostly long and you lose 2% and the market goes down 3% your considered ahead of the game. The risk reward just doesn't add up how funds are evaluated. Its just something to think of.
    #10     Aug 28, 2010