I hope to build a business out of this. There are many elements of proper investment research which I cannot employ until I achieve scale well beyond my current level, such as: 1. access to management teams and sellside and buyside networks 2. more through investment research using supporting analysts, 3. more thorough channel checks, 4. more coverage and types of analysis employed, such as macro or quantitative. I have many ideas for the types of research I want to do, but as one person with a relatively modest amount of capital, I limited in my options. My universe right now consist mostly of consumer facing names across the Internet, consumer products, and retail sectors. I think my most meaningful tailwind has not been exposure to any one sector, but probably significant net long exposure to growth, which has benefited significantly from the risk on rally we've had over the past several years. That said, I would attribute only a small portion of my alpha to favorable sector or category exposure.
Ironically, most groups who do what you are talking about actually realize a dramatic reduction in performance as compared to their small prop days. The most typical reason is that once they have access to sophisticated analysis, they begin realizing a more accurate quantification of risk. When they were using crude risk measures, they thought that they only had something like 20% DaR (drawdown at risk). More accurate and precise analysis shows them that many times it is at least double that. Once they realize their vulnerabilities they aren't willing to stick their neck out so far. They reduce size or increase hedges and returns suffer. Over the very long term this is better for them, as their program is more robust. But short term it usually hurts.
[ Naturally I would expect to realize a significant moderation from the extreme level of returns I have achieved, although I would expect the structural reason for that to primarily come from the fact that at scale, I would no longer be able to exploit my current nimbleness. I believe I am taking a fair bit of risk right now, but probably as high as my headline returns would suggest. For example, despite what I noted to be my significant net long exposure to growth and internet stocks, while that whole group was crashing in April to May of this year, I was still up 2.5% during that period. During the past 3.5 years, my worst draw down has been less than 10%. I average about 55% net long exposure and probably around 1.0 beta adj. net long exposure. One of the biggest kinds of risk that I do take on is that on rare occasions I do take on a very big bet. On 2 occasions over the past 3 years, I have gone as high as 30% of the portfolio in one position. Most funds would not be able to do this, although a few funds do also subscribe to the merits taking a few highly concentrated, high conviction bets, and I hope to maintain this element of my strategy even at much larger AUM.
When you state a max 10% DD are you referring to monthly or daily? FYI, while a required performance capsule only indicates peak-to-trough drawdowns on a monthly basis, these days almost every investor wants dailies. Just so you are aware. There are many highly volatile programs with quick recovery periods that can go 2-3 years with a max monthly DD of 10%. When dailies are figured, many of them reveal 15%, 20%, or more. That's what the due diligence process will look for. Another thing you're gonna have a hard time with is simply the class you are in. Long-short equity is the most saturated space. You've got a ton of competition there, and many of them have your exact same story. Prop guys who were killing it in personal accts during a strongly trending market. The best conditions for long-short equity are a lengthy strong bull trend. Such conditions make it easier to identify relative winners and losers. It would be a more convincing story if you had audited history from 2008-2010, but it doesn't sound like you do. Keep in mind that many guys you meet with heard this exact same story in 2007. There had been 4 years of strong bull trend with only small corrections. The equity guys were all killing it and they got crushed in 08' I personally don't know a single investor looking for more equity exposure here. After '08 they all realized that they were oversubscribed to equity funds, and now they are pushing capital into all the other asset classes. Fixed income arbitrage made the biggest run the last couple years, with a ton of capital flowing that direction. Real estate and private equity as well. It looks like those are drying up a bit now and CTA/CPO are starting to get heavier allocations. Not many people are looking for another equity strategy. In the equity space, you're really gonna have a hard time finding anyone ok with the idea of a 30% portfolio weighting on a single position. Much closer to 5% is preferable.
The less than 10% DD is my estimation of what the max DD was on a daily basis, although its not something I've tracked so I don't know the exact number. Max DD on a monthly is 5.8%. Yeah I don't anticipate it will be easy to raise capital, which is one reason why I have not directed much effort towards that route for the time being. I believe my lack of scale is the biggest impediment here, as you and others have noted, and I've also confirmed from my own findings. I realize it is generally easy to discount any set of good returns in a bull market such as the one we've been in. I am highly critical of dissenting my own results, and I have only been very encouraged by my conclusions. For example, during this past 3.5 year period my shorts, excluding gains from my short term strategy, has contributed about 10% a year to my total returns, while I have averaged about 60% gross short exposure across a fairly diversified short book (also with significant unfavorable growth exposure). Still, at the end of the day, I fully appreciate that it is impossible to know how much luck has contributed to returns. Yeah I realize that most institutional investors will not be okay with that kind of concentrated positions, but I am looking to maximize my risk adjusted returns, and not trying to optimize my strategy for investor interest. If you take out any impact from concentrated bets that are over 5%, I still have about 50 positions in at a time, and that piece has also performed extremely well. I hope I don't come across as bragging, although I am proud of my returns thus far. I fully appreciate the fact that results at this level will be very difficult to sustain. As of today I'm up about 34% this year, which although obviously much lower than the past years, I still consider to be an extremely good result, especially considering my short term strategy is unprofitable this year.
There is no bragging in this industry. The numbers keep score. If they're good, they're good. My last piece of advice would be to start keeping a lower profile once you feel like you'd like to start managing OPM. At that point you won't be able to make comments about being "up about 34% this year" on a public forum, unless you want the regulatory hassles that come with it.