I really didn't catch this post before, but I think it is worth getting back to. I really would like Heech's take on the question that I asked earlier and it might shed some light on the answers he's seeking in this post. Heech, you have implied that by taking the steps to validate my track record and get it posted to a couple of the industry trackers, that there are huge financial rewards in the waiting. I wasn't trying to be flippant when I asked for you to provide examples of these huge rewards. Let's assume for a moment that I can average 300-400% over five years, having started with just $50K. Also assume a 3.5 sharpe and a peak/trough drawdown of around 10%. This is a realistic question. If I come out of the anonymous realm, what's in it for me? I've answered these questions for myself in the past, but I would love to hear your take.
I only care about making 25k per year. I have another job, so everything I make is a free roll. I save every dollar and buy investments with it. (Not sock investments)
Money... I have $1M and I make 20% a year what are my options? Option 1: I trade my money and earn $200k a year. Option 2: I trade other people's money + my money. Let's say I'm small and I only attract $50M and charge 1%/10% (conservative). I earn $200k + $500K + $1M. I have about $100K fixed costs. And I hire two salespeople to grow the business 2x $250k and one person to handle client management 1x $100k. Total income: Option 1: $200K /yr Option 2: $1M /yr Ninna
Sorry Ninna, you missed the point. I'm NOT talking about 20% annual. I'm suggesting around 350% annual and a strat that can only scale up to about $30MM. Do the math again, using my numbers this time and tell me if you reach the same conclusion.
A few comments: - I currently have about $3mm of my own money in the fund. I started this just as a way to trade my own money, and made around $1mm last year... so obviously, I was very happy with the status quo. But it was precisely the potential financial rewards from trading OPM that made me go the fund formation route. If you do the math, once I get to $10mm of OPM, assuming* I can maintain this performance, my performance fees begin to beat capital growth in my own money. - There's no way I'm going to leverage up more than I already am (50% M/E). A Sharpe ratio of 2 is a measure of history, not future results! It'd be irresponsible to my wife/kids to gamble at higher leverage than that. - I've been telling investors that the capacity for my strategy is $250mm. I think this is achievable, but speaking as an engineer first/foremost... I'll only know for sure when I get there, only then will I have a firm idea of my ability to execute. Note that even at $250mm, I would probably only be trading something like ~3000 ES, ~3000 CL on a daily basis. And I believe those markets can absorb my needs. Keep in mind I'm trading 99% automated with a black box, so these trades can be algorithmically spaced out without too much effect (I think/hope/expect). Capacity might even be higher, because there are a number of instruments I expect I will be able to diversify too... I just haven't had the need/opportunity. Again, because I'm 99% automated... expanding instruments isn't any special hardship. I just gotta pay for the silicon. As far as the financial rewards of OPM... if you just do the math, it works out pretty simply. If lets say you get to $50 mm in other people's money, and you're able to deliver 30% returns. (I'm actually a 0/30 structure, but let's say you're 2/20.) This means you're getting 6% of their AUM on an annual basis... or $3mm a year. I should also add, $3mm year on a compounding basis. Now, what else are you doing in your life that can equate to $3mm a year on a compounding basis? And I've had multiple fund raisers tell me, once you get to $50mm in assets... it's actually "easy" to get to $250, $500mm and beyond as long as your strategy scales. If you're at $250 million in OPM, now you're at $15 mm a year. That's plenty of motivation for me. This is *not* to say it's easy getting to that $50mm mark. For one thing, I'm not there! But again, investors out there are *looking* for superior managers. They've just been burned time and time again by lucky managers on a hot streak, so they're going to take time to evaluate your abilities. If you can maintain a high Sharpe for 3+ years, they will bang down your doors. *And just in case this isn't firmly obvious: I'm very, very well aware that my future success in this industry is up in the air every single day. It doesn't matter if my Sharpe is 2.0+ historically, all it takes is one bad day to end all of my plans. The market keeps me very humble about my future prospects.
Cache Landing, Again, not to judge your abilities here... but unless you've already booked $10mm in profits from your strategy, then I consider your example extremely, extremely hypothetical, and completely unrealistic. But to answer your question: if you have a strategy that delivers 350% annual and only scales up to about $30mm... this means you will VERY quickly be making $100mm a year, every year in trading gains from your own money. ($30mm x 3.5). You most definitely don't need to manage other people's money, and your greatest challenge will be finding other people to help manage yours... (I know a great fund manager!) At that point, you really don't need advice from me or anyone else here, unless you need help picking out a yacht.
This puts you at a conservative $12M and you want more rewards? But seriously , why does everyone talk about trading in terms of "account equity %" when we all know that it is not accurate to do so. Strategies yeild an upper limit defined as a dollar amount, which depending on your "collateral bond" can make your gains look like 10% or 400%. I really wish people would stop doing that. Its more correct to judge performance on BP or volume or shares traded or contracts traded, anything that is tied to equity is completely decieving. Assume you have small cap strategy that can only yield a max dollar PNL of 100k on average every year. You can not compound this number, because of scalability. Therefore, account equity % gain is moot. You should instead calculate the amount of daily BP you need to make this 100k. If your daily BP required for your strat to reach its maximum potential is 500k in BP, that means year after year, you performance is 20% on BP. If you were to use % on equity instead, depending on what your initial starting capital was, you would have wildy different return percentages. Most of the top dogs on ET rarely talk about % change on equity, but they rather have some sort of metric that accurately gauges performace based on how much they are trading, not based on their collateral that they put up. Doesnt anyone here read lescors journal, its already so well documented.
+1 What kind of feedbacks did you get with your 0/30 structure? Do you think it's easier to market than 2/20 or 1/20? Ninna
I don't completely disagree with you here, but I think if I were to gauge my performance they way you are suggesting, it would actually be less representative of actual results. I don't worry about collateral bonds or the like. I trade from a cash account. When I suggest 300% returns it means that if there were no deposits or withdrawals during that year, and account equity was $100K on Jan 1 it will be $400K on Dec 31. IMO, you can't get more accurate than that.