Interesting logic. So by extension, the fact that there are many multiples of that number who are trading individually via prop or otherwise, implies that your trading edge is negative. Can I short you?
There is the premise that one would make money, else I agree - why bother? The comparison between prop trader and HF mgr is a bit misleading. It should be between prop mgr/owner and HF mgr. There is no way a prop mgr/owner is going to fund an individual into the 8/9 figure range of equity. The HF mgr is looking to become wealthy by making others wealthy. If early investors stay with the HF mgr and he succeeds, they will ALL become proportionately wealthy. The prop mgr is going to see upwards of 90% of his "investors" go home broke and will become wealthy based on the frequency of their trading. It does depend on your edge. If you have an edge and can scale it up, I wouldn't want a prop mgr looking over my shoulder and having to "approve" my methods and positions. With the many new products of the last few years and about 8,000 hedge funds out there now, I still believe there are significant edges that are exploitable for some years to come. The traditional arbitrage, M&A and others from years past are significantly more difficult. I agree with your statement that as a whole, the HF industry is a pretty mediocre place to invest. You have to pick and choose wisely, but "collecting a fee" it is not. At least not for some. I believe the mgr should be sharing an edge with others that he is using on his personal account (within the fund). The difference being that he grows his personal wealth exponentially more by enriching others who took this risk with him in the first place.
And I might add that on shorting prop traders, your timing is off by 4 years... 8000 MF and 6000-8000 hedgefunds...who needs that BS... the time to be starting in hedge funds was 25 years ago..pls...now everyone with good trade behind them and a degree from MIT want's in? Sounds like the prop guys of yesteryear to me... What else are the Bulge house layoff-ees gonna do?
One other question, if you have a 25k deposit for trading with a prop firm, is it possible to lose more than that? Or are your losses limited to the 25k? (Assuming you are trading with some leverage say 1 million?) I'm just asking because if you were trading 1 million and you lose 30%, that is 300k. So who eats the 275k? Or is that were the "haircut" and other prop firm fees come into play to help compensate them from credit risk? Thanks, -Taric
Most prop firms are pretty tight lipped when you talk to them about losses. The truth is that 90% of traders at prop firms are sitting on negative account values. In some cases very large deficits. It's not uncommon for a trader to be several hundred thousand in the hole. Now let me qualify this statement. If you don't have a track record or if you have never traded before, don't expect to get a million dollars in buying power and do not even attempt to start a hedge fund. The guys I am referring to who have these losses have probably generated several times their deficit in commissions so nobody is eating anything although in an indirect way the firm is. So I am making an assumption here that those of you who are asking about this have several years trading experience underneath you or a good track record.
I guess first of all, we should be clear on how we're defining prop firms in this discussion, because it's a common source of confusion. There are two models. In the first, the firm rigorously screens potential candidates and hires them as employees, trains them in the house's specific methods and gives them a lot of rope. In this scenario, I could see guys being down 6 figures and still in business, because the plan was always to use house money and the bosses have confidence in their guys and their methods. The second, and more common, business model is where the trader puts up capital and is basically opening a retail trading account on steroids. You get too low on your capital and you will get a call to deposit more funds. An overnight position blows up and you are net negative, it's put up cash or bye-bye. Sometimes the firm will let you go negative, for sure. They like you, you have a good record, do big volume, etc. The firm's model is to collect commission, and do it in a low risk manner. If they have confidence you can pull yourself out of trouble and keep churning volume, they will keep you alive, because they are making cash off you the whole time. But it's an exception, not a matter of course. But 90% of the firm's accounts under water? No way. Simply because at prop firm's, like all traders in general, a large number are losing or making very little and thier records don't warrant taking a risk on them.
Yeah I guess it's a good idea to differentiate the various prop firms. I know today firms are much more careful then they were in the past. So take the prop firm where you are paid a salary, and get a split, in this case, you could lose massive amounts of money in theory although you better show some promise while you are doing it. LOL. Now in the other example where you put up 25k or so and trade. I know for a fact that Worldco use to make it a habit to clean out accounts that were negative. We had guys there that were 100k to 500k in the hole. But they generated anywhere from 1 million to 3 million a year in commissions so it was worth it for the firm to do this. One of their best traders, was down a million plus before making it all back. For guys that generate less commission, you obviously have less rope. If you generate 500k a year in fees, you could probably get away with a 250k deficit. And so on and so on. I knew guys that were down 25k to 50k that had their accounts cleaned every 6 months. So yes, they did do this a few years back. Do they do this today? I have no idea. From what I have heard this practice is frowned upon now and with Worldco going under, I can see why. LOL. The bottom line is you have to make money or what are you doing in this business. If a firm is making serious commissions on you, you will always get some leeway. I don't think that will ever change. But when I hear guys asking about how much money they can lose, I can tell you right now, you are in the wrong business. That is not a good attitude to have and asking firms this question makes you look like a bad trader. So the short answer is just don't lose money. Make it easy on yourself. LOL.
One of the major benefits with a having a hedge fund is that your building a business. If your good at it you will make a lot of money. In the beginning it will be tough, but at least you know if you are sucessful you will create something will last for a long time. Prop trading major plus is that you are getting access to funds quicker then a hedge fund would normally be able to from start. It depends on whether you would want to buy the cow's milk or go straight to the source and purchase the cow.