The large institutions have separate job postings for traders and PMs. How exactly are their roles different? Don't PMs have to make trading decisions? And traders must manage the trades(portfolio) as well? What is the typical career path that leads to PM in money management or hedge funds? I am looking at this from an individual trader point of view, since any individual trading his/her own account must also manage the portfolio. So how is this different from an institutional setting? Thanks for any clarification.
I'm with such a buy-side institution. The way it works is, (1) PMs make the final calls on trades and allocations; In general, PMs own the portfolio's performance. (2) Traders are responsible for executing the PMs' decisions by going out to the market and buy/sell accordingly. They also must make sure the trades get into the right accounts and so on; A good trader also provides feedback to the PM on the market colors and generate tactical trading ideas from what he's seeing. You are also leaving out another critical category: (3) Analysts. They do the deep due diligence. In some shops, they play more of a research role; in others, they are much closer to making trading calls or are actually making trading calls and acting like a junior pm. The usual route to PM is going from analyst to taking on PM responsibility to PM. A trader may also go directly to PM or to analyst and to PM. As to how you get into the business, you get in as either a trader or PM. You can get in from the bottom as either as a graduate from a decent place and being relative bright and get hired as a junior analyst. The trading side is harder to go. You may have to start out as a backoffice monkey, then a trade assistant, and then a junior trader. It's refreshing to hear a question about the actual finance business aside from the usual "I trade 1 ES contracts and therefore I know everything about running billion dollar portfolios" business. I'd be happy to answer any more questions.
Hi sjfan, Thanks for offering an insider point of view. The difference between managing billion dollar hedge fund and the "trading" in the context of this forum is exactly what I am trying to understand. With all due respect to those actually working in the industry, what I am about to say might be a gross misconception, but that's what I am trying to clarify. From what you described, it seems that the role of trader in an institution is limited to mostly execution. In that sense, isn't it more difficult to succeed as an individual trader than as a trader in a large institution? In this forum and in the context of general "trading" literature, some constant themes for successful trading include doing research to find an edge(analysis), design strategies to profit from the edge(trading), and proper money management and diversification(portfolio management). In an institution, the roles are specialized and tasks are spread among analysts, traders, and PMs. However, the individual trader has to do all three equally well by him/herself in order to become successful. That's why I have the impression(could be a misconception) that becoming a successful individual trader requires more skills than being an analyst/trader/PM in a large fund. Yet the people in the funds, even the mediocre ones, generally make much fatter paycheck than even the most successful individual traders. That does not seem to be "fair." Please correct me if anyone disagrees with my impression. I am open to a more accurate understanding of the money management industry. Thanks in advance,
sjfan was talking about PM and trader on the buy side. on wall street, there are also positions on the sell side. on the sell side, institutional trader is more like an individual trader, that is, he has to trade the market to make money. on the buy side, the trader is not really a trader, he is more like a broker for order flows.
Yes, and no, in a "small" hedge fund the trader is not only the eyes and ears to the sell side salesmen/salestraders, he also wears the hat as discretionary trader, and participates in the fruits of his labor, (P&L). An institutional trader now a days on the sell side is an order taker and takes minimal capital risk. The Sales Trader shops the desk's order flow and research to the buy side trader and tries to add value and compete for very few commission dollars being given out. The duties of "Trader" are not as clear cut as one might think, and varies from firm to firm. I have worked on both sides of the fence.
This is very right. Sell side is very different from the buy side. Sales traders are sort of a combination of market makers, dealers, and salesmmen; In a lot of cases, especially in OTC instruments, they get a bit of risk capital so they end up running a bit of prop trading by holding on to some inventory of what they are dealing.
The reason for the roles to be seperated is because an instiution typically has hundreds of accounts and products spread across various asset classes, with each product having different goals and guidelines. Also, do keep in mind that the vast majority of institutionally managed money aren't hedge fund style of absolute return based. A huge amount are benchmark based (ie, the funds' mandate is to make LIBOR + 1%, or Barclay Aggregate + 50 bps, or a custom liability benchmark + 200 bps). Benchmark management is a rather different beast from what retail guys are used to. But it's vital for dealing with pension funds and endowments and as such. Okay, it's certain true that being a successful individual trader is harder than being a successful institutional guy. But that's rather like saying it's harder to succeed as a street vendor than running a walmart since the street vendor needs to do all the jobs of all the execs at walmart. It's true, but it's also a bit beside the point, isn't it? Take a successful retail trader (the 2 that might be around here), and drop them in a billion dollar portfolio. I guarantee that without some serious help, they won't last a week. Take a good PM with a good performance record now. He has the option of breaking out, starting a new portfolio where he calls all the shot, and have a decent chance of doing well if his product space is liquid. Otherwise, he'll need the support to be able to take care of all the trading so he can do what he's good at - decisions. Institutions, be it buy side PMs, or sale side dealers, aren't terribly interested in "trading". They are running businesses. They compute their free structures, product offerings, efficiency of operations, etc.
And just to make a quick follow up point - from an institutional perspective (and I've read a lot of these trading books when I was in college starting out), they are mostly completely amateur hour compared to our best practice. Institutional strategy design does deep diving simulations (without assuming normality, which every one assumes we assume) and optimization to find the right allocations. Money management isn't about a martingale or some quick expectation based rule of thumb like Kelly. We got lots and lots of work done on how to optimally pick stop loss points, position size limits, and exposure limits that I have never seen mentioned around here. Analysis isn't about MAs that are backtested somewhere; We got analysts who models business cashflows down to the input price of its production line. Execution traders have to deal with fragmented OTC markets and work orders that may take days to complete. They are also sometime benchmarked harshly to see how efficient their trading is in terms of delay cost and opportunity cost. So while an individual trader by definition has all the roles of every specialist in an insitution, he's not doing the same sort of work as they are.
...so true... For every not passive index fund oriented money manager : http://allaboutalpha.com/blog/
Hi sjfan, Thanks again for even more clarification about how the industry really works. The walmart analogy is great in that it shows economy of scale also applies to traders. If the odds are so against individual traders becoming successful on their own, would you recommend someone whose goal is a successful trading career to forget about trading for his/her own account and just try to get a job in a fund management firm? The original motivation of my question is that I find myself having to spend so much time on many different issues, from strategy design to backtesting to portfolio level optimization to automation programming......, etc. Should I just try to get a job in a firm and focus on just one function that I do the best? The only problem is I don't have any formal education in finance. Everything is self-taught. Since you mentioned money management and Kelly, can you also help to take a look at my other post: http://www.elitetrader.com/vb/showthread.php?s=&threadid=164157