ROIC versus Portfolio Return

Do I have this right? Portfolio return is the return on your pool of capital; ROIC is your return on that portion used for trading, which I presume would exclude cash in the portfolio.

 

correct. If you are using derivatives for synthetic leverage you would need to adjust for that (ie short put and call overwrite would have the same ROIC)

 

What difference does it make? Bottom line is did you or did you not grow your net worth through trading and/or investing?

 

It's a very large difference,and you got straight to the "bottom line"...

 

I dont think it makes any difference. People get bogged down worrying about stupid,useless shit like that and that's why they remain losing traders.

 

Of course it makes a difference but you arent thinking like a hedge fund manager or risk manager...

Look at LTCM..Returning between 27 and 40%,but leveraged up as much as 30-1..
Should you look at their return on notional or levered?? Would you be somewhat concerned with the leverage?

Would you be somewhat concerned with a guy selling OTM vol in big size but under PM radar??

Take the flip side..Some guy at Millenium is allocated 10 mil...Finds some arb,makes 500k with never a drawdown,but is only using 1 mil. Would you cut the guy loose,pull capital and reallocate,or ask the guy if he can get 10-20 x bigger

 

In the book valuations (published by McKinsey) they say the only real quality value creation can be seen when you seek to maximize ROIC. Maximizing ROE can mask poor quality returns through leverage.

 

The OP never mentioned anything about risk management,why are you bringing that into the discussion? Keeping track of your original deposit(or a benchmark date) and any deposits and/or withdrawals made to said account should be enough to tell how much that account grew or shrank. If you have more than one account you'll need to do it for each one.

 

How do you know what his ROIC is if you dont know if hes trading under PM,RegT or a cash account?

Do you trade vol,I think that may be our difference in our thought process.

 

I'm just a retail trader with no aspirations of becoming the manager of a large hedge fund so I'll bow out of this discussion.