Interesting, I might consider it, gotta think about it. Right now I'm putting a bit the chariot before the horse (I still have to run my strategy privately for a while), but I like to know in advance what options I have after that.
>> PS. If can make 5 million with a reasonable IR and ROC (say IR of 5 and ROC of 20%), you can find plenty of shops that would give you 25-35% of your revenue as a payout. OK, I gotta ask some questions related to how these prop shops operate. a) Do they require that you explain your strategy to them? b) If not #a, at least do they require that you show them your trade history (& ongoing trades) so they can track the risk you're taking? I would expect at least #b, case when question #c. c) What happens if #b and they successfully reverse engineer the #a in your strategy? Asking these questions from both the perspective of working *for* a prop shop and conversely, say I would somehow handle the sales part and get a significant amount of capital. If my strategy stops working then I'd need to have some backups and diversifying (working with several traders other than me) would be an idea. In this case, I'm telling you I wouldn't fund jack squat if I wouldn't get #b: the historical trades AND the live trades. I know at least that much finance as to figure out weather the whole stuff can blow up. Case when no deal, from my point of view these guys were just lucky. But then there's the very real possibility of me reverse engineering what they do. Afterall I've worked 10 years as a quant developer and developed my own working strategy in the past two, so I do know some tricks. So how are these things handled in the industry?
Aquarians, May I ask a couple of questions: 1. You have a few months' record of ~ 25% annualized return. As a point of reference, SPY returned 23.7% in one year to date, MSCI EAFE returned 26.5% in one year to date. 2. What is your return on a risk adjusted basis?
1. 24 months are not that "few". If something doesn't show results after 2 years then funk it, I'm not interested in it. 2. Haven't computed it and now I'm busy developing the live trading system. After I'm having it running in staging environment, I'll get back to backtests and run the strategy over a longer time period (which is quite a hassle since I have to import a lot of data which takes time). Eventually I'll compute a Sharpe ratio or whatever people expect to see when they say "risk adjusted". For now, for myself I know that putting in $1 and getting out $2 is a pretty good deal, while putting $100 and getting $50 is not.
By the way, I think this is what people talk about when they describe "prop trading" firms: https://www.indeed.co.uk/cmp/100-Point-Capital/jobs/Financial-Market-Trader-5f5fadc6fc35c30c "No previous financial market experience or specific academic qualifications necessary. Applicant must be financially sound and able to commit a one off £25k. £15k - (12 month onsite mentorship) to be paid in advance.) £10k - (Applicants funds for trading capital, to be held by the applicant)." Looks like "prop trading" and "hedge fund" are just as related as the following Radio Yerevan joke: - Q: Is is true that Stahanov was given a car for free? - A: Yes, it's true only not a car but a bicycle and it wasn't given to him but stolen from him.
Well, in all fairness, proper “prop firms” are only different from the hedge funds in how they source their capital. I am still struggling to understand the concept of prop firm as described above (if you get to trade your own capital, why not do it from home?). PS. I guess maybe the idea is that they provide capital in a first-loss form? Not sure
What's the IR on this strategy? Does not look too smooth to me. The number of time periods that you need to verify a Sharpe ratio with 95% confidence is Q(0.95)^2*(1+0.5*SR^2)/SR^2. PS. Here is a a handy table of performance days needed for different confidence intervals for a range of Sharpe ratios: Code: 90.0 95.0 98.0 0.5 1683 2773 4323 1.0 422 695 1084 1.5 189 311 484 2.0 107 176 274 2.5 69 114 177 3.0 48 80 124 3.5 36 59 92 4.0 28 46 72 4.5 22 37 58
The prop firms referred to most on ET, in the US, are based on a joint back office (“JBO”) arrangement with a clearing broker. https://www.finra.org/sites/default/files/NoticeDocument/p004001.pdf Basically, an SEC registered broker dealer with $1mm in net capital, can solicit a type of partner that will add their capital to firm capital in return for a payout of net earning from their trading. The trader's capital is first loss and the firm can provide extreme leverage on that first loss money as they can use not only the $1mm the firm was started with but all the capital of all the traders. They can use the JBO relationship to maximize this leverage and get many of the advantages of the clearing firm. Although there are some JBO prop firms that focus on option market making that require $150K or more, most in the past focused on equity day trading and accepted as little as $5000 in a deposit. Any trader deposits used toward net capital, requires a holding persion of 1 year and are not protected by SIPC. This gives an under funded trader 10x to 50x leverage for DT. The parent firm makes most of their money from charging for training and commissions that they mark up from the clearing firm costs. So to answer your question, "if you get to trade your own capital, why not do it from home," most can't get leverage with their own capital or the lower trading rates that the prop firm can offer for a small account. Most of these prop firms are gone. Only a small handful remain.
The most important item to remember is where profits come from. You are correct, the only real difference between a hedge fund and a true prop firm is that prop firms are not set up to raise AUM and Hedge funds are. They both generate profits for the owners from profits. A JBO Prop firm generates most profits from training or activity from their own partners that risk their capital before the prop firm. Even though the SEC/FINRA consider it a red flag when a business pays out near 100% of trading profits, that has not stopped these firms from getting around that.