Yes, indeed. Although, this assumes that the "oh shit" moment actually happens with these types of leveraged, market neutral strategies. If it doesn't, then I would certainly prefer the strategy with very small drawdowns and steady returns. I hear what you are saying about the breakdown in the asset relationship hurting you. This would be mitigated substantially by having several hundred, perhaps thousands of these relationships you are betting on, such that any one of them going against you has a minimal impact. Of course, one could point out that all the spreads could go against you at the same time. However, if all these spreads are uncorrelated, then the chance of this happening is extremely, extremely low. Now, I can already hear the peanut gallery grumbling about LTCM or the quant meltdown and how correlations all go to extremes under certain distressed market conditions and that you will get taken to the cleaners eventually. I don't discount this scenario, but I will point out that - provided the portfolio is structured correctly - you can minimize your exposure to this scenario greatly. Certainly, you have a much higher probability of getting blown out on a directional trade that hits you during a freak market scenario (such as the flash crash) then you do on 1000 uncorrelated spreads going against you at the same time.
Yep, fair point once again... very little black and white with this stuff, and lots of gray, with much dependence on the skill, care, and quality of the trader, the strategy, and the execution. Also, re, preference: Different strokes for different folks etcetera. My preferred combination (that is realistically achievable in the real world) is: - higher potential for drawdowns within a predetermined volatility band - much reduced probability of seeing a drawdown spike outside the band - significant embedded optionality, re, possibility of achieving far greater returns than the standard targeted return (e.g. setting 20% as benchmark for a good year, then seeing opportunities and exploiting them as such that one delivers 80%). The above combo fits discretionary go anywhere global macro -- surprise surprise, my particular brand of vodka -- but steady eddie grind 'em out strategies with occasional black swan issues not so much. (And the more the black swan is guarded against, the less optionality you have in terms of upside return outliers.) But again, lots of ways to skin a cat... and different ways to appeal...
I totally agree...different strokes for different folks. There is certainly more than enough room for both types of trading strategies. At some point, I'm going to reach out to a few of these first loss providers to get more details. Any advice on some good ones to talk to?
How is this different than what Mercenary Trader & RAPA are offering? RAPA guy on another thread said they will share the losses... ps I am not associated with either.