My experience so far, based on my funds' 16 months of trading history, is that it's absolutely possible to raise money if your performance justifies it. It's obviously easier if you have a great pedigree or a Nobel prize in economics, regardless of your actual trading numbers... but even if you all you do is walk in off the street (like I am), the primary challenge is performance. My Sharpe is just a bit over 2.0. If you have a Sharpe ratio that's 1.5+, with reasonable draw-downs and great annual returns, you *will* get attention. I'm in the early stages of due-dil with probably 8-10 fund of funds, at this point. I think I can close a couple within the next 6-12 months, as long as my performance stays in this general area. And once I get to the three year mark (if I can maintain a 2.0 Sharpe), I seriously expect the floodgates to open. Of course, talk is cheap...
Is that a typo? How can you possibly make a living, nevermind decent one with 10k base? Even if you make a 100% gain and live in the middle of nowhere in one of those redneck states, it still won't be enough to cover living cost.
This thread has now really peaked my interest because I believe everything you just said, but my only burning question is why would you. I believe a cost analysis is in order - we need to determine if it is in your interest to do so. I have no doubts about your figures but it just makes more sense to leverage or borrow funds. When your sharpe ratio approaches 2 or greater, there is a lot less risk in using huge leverage because your expectancy is so high. 1.We need to state the maximum potential a strategy can extract from the market. 2.Then we need to figure the max BP need. 3. Then need to set aside a sufficient collateral for DD or leverage ratio, in other words "equity". If you have a strategy that can yield (1) $10M in profits, which is no small feat! You might need (2)BP of lets say only 20M because of excellent statistical expectancy/PF/Sharpe. If we back into (3) equity needed, by using roughly 10x, then the total equity you need is only about 1M. What is the point of raising millions of dollars in OPM when all you need to realize the maximum potential of your strategy is only 1M. It does not add up, you will end up hurting your own profitability based on the numbers you provided. We seriously should throw in any hypothetical numbers you want, and then crunch these numbers to see if its beneficial for you. If we give you the benefit of the doubt and say you trade the most liquid contract in the world, ES, and you can push 150 cars with out any slippage, thats a total BP of about $10M, holy shit. The collateral required using plain jane portfolio margin, about 6x, is $1.5M..., If you have spectacular stats - PF in the order of 3+, 6x is very safe. You do not need to raise millions, in fact "only" 1.5 million and not many millions. Perhaps there is some information that you may have left out that may change this? For example very small initial equity...lets say you do not have $1.5M and you need OPM, ok even then, you only need OPM of $1.5M what is all this excess OPM going to do for you? You need to throw out some hypothetical number, so that we can get to the bottom of this.
When your sharpe ratio approaches 2 or greater, there is a lot less risk in using huge leverage because your expectancy is so high. A strategy with a sharpe ratio of 2 or more is not guaranteed to always perform to this level. Huge leverage combined with the unexpected is what causes blow-ups.
Your premise is correct, but I don't see a reason to stop at 150 cars on a ticker like ES. He already stated that he rarely nails the top or bottom of a bar, which means he can run limit orders. Slippage then is a known variable cost and wouldn't increase with size, within reason. Given those assumptions, he could easily trade 2,000 cars without the market taking any notice. I would also assume that he doesn't simply find a sweet spot and bet the farm. If he scales in and out of positions, then he could easily trade 3X that. IMO, any strat that returns around 20-40% should be able to scale, usually into the $100MM+. In this case, it is certainly in his best interest to trade OPM.
So true. Even with a sharpe 3.4, I only really ever use about 15-20% of available margin. A high sharpe isn't a guarantee of rapid success. There are still freak periods where price action goes screwy.
Sarcastic isn't the word. Not sure what I would call it; vocab isn't my strong suit. I was totally serious about the theoretical possibility, but facetiously implying a high probability.