The hedge fund D.E. Shaw was another example. David Shaw started his hedge fund with four people. His strategies were so successful for almost ten years that Bank of America was willing to gave them billions of UNSECURED loans in order to share part of the trading gains. In August 1998, his company had about 1,000 employees globally(with offices at New York, Boston, California, Hong Kong, India, etc.). After the big drawdowns at the end of 1998, they sold most of their assets. I doubt they had more than 300 people in August 1999. http://www.elitetrader.com/vb/showthread.php?s=&postid=200371&highlight=shaw#post200371 Long Term Capital Management was so successful that they returned the money to some investors. At that time, they had so much money and so profitable for so long that did not bother to accept/attract new investors. That was about one year before the collapse. http://www.elitetrader.com/vb/showthread.php?s=&postid=184392&highlight=supreme#post184392
you see, the thing about any 'system' is that its validity deteriorates over time....ANY system....so funds cant take a profitable system and etc etc etc, because the ENVIRONMENT changes and the system is no longer valid.....thats what these systematic idiots dont understand.......the mkt is not a mathmatical model, nor is it random, nor is it efficient, and this is ANY market that has human participants.......im not hating at all if your taking money out of the market, kudos! but my cousin wks at the biggest quant prop firm in existance.....and trust me ive had MANY long conversations with him about this....systems are like options, they all have time decay, and from the moment you begin working on one, it begins to deteriorate, so just beware that you will have to continually tweak you system to changing mkt conditions etc, as the environment changes......but WAIT thats sounds kind of like a discretionary processs......hmmm....
The answer is in your own post if you go beyond that a little bit. Assumptions: --You have a 100K trading account (maybe bigger) --You trade in one market (e-mini's, given the location of your post or as you stated) --You have generated 60% returns last year (maybe more) Now you started a hedge fund, raised 10 million (moderate) and are set to go. Before you hit that buy/sell button, ask yourself this: "Can I trade the same way(system) in the same market, using the same kind of leverage, to generate the same returns?"
Because buying a contract at an X MA cross, on a 5 minute bar when Stochs hit Y, after 10:30, using an ATR entry...etc, etc., isn't really much of a "system". Sure, it worked last year and seems to be working now but are you just fooling yourself with a curve-fit? Most likely. And take that wondrous "system" you discovered and try to sell it to the "Big Boy" hedge funds and they'll probably throw their coffee on you and not invite you back for Sushi Day.
I didn't catch if you were doing futures or stocks. Assuming futures................... Large asset companies (the big boys) with enormous size cannot just lay on a trade like you and me. The trade has to go in in pieces. This limits the time frames that they can work. When the trade goes against them, they are stuck and have to ride the decision out or just really take a bath. Or they can have a 1000 traders that all do the same mechanical trade over and over scalping for dinky amounts. And as several have already said, mechanical systems tend to be limited to a specific economic model: interest rates are dropping/rising, inflation is rising or falling, gold is high, etc. The big guys play in a whole different world. I like my world better. I can take my 10 S&P points a week on relatively dinky size and do just fine. Then there is the Marge who I saw on a CME floor tour. She does 7 figures annually standing in a pit at the CME and has 6 figure drawdowns. She qualifies as a big boy in my book.
Exactly, most traders at large hedge funds must have their orders worked by the execution desk. You think SC actually places order for stocks himself? Come on. Maybe on some indices cause he feels like it but most of them have to be played with a longer time frame in mind. So when you make your little $20 they are working to make 2,000,000 on that trade. They don't care about paying 3 - 4x on the commission, so long as the brokers work with them every time. You're just another profitable trader my friend, that's it. Fear not now but the road is long.
If you have not read WHEN GENIUS FAILED, The Rise and Fall of Long Term Capital Management, I highly suggest that you do. It should do a WAY better job explaining why big houses fail then I do. One problem is the fact that YOU are trading a smaller account. I think of the big houses as the sharks and myself as those fish that suck onto the bottom of them feeding of their scraps. You can make a very good living scalping off scraps. There in lies the problem, though. If you are a big shark with a good edge, it is only a matter of time before people jump on it. The amount of money that these houses have to put to work grows as their profitability does. Soon, when "The Street" sees you starting to put on positions, they will basically front run/piggy back you and take that edge away any way they can. Imagine trying to put $1 billion to work as opposed to $1 million and everybody knows you're profitable. Soros' return on 30% is on billions of dollars. If you do outstanding and return 100% on a $50K account, $ wise it does not look as sexy as Soros' return. But, the size Soros has to get off to return that 30% is MASSIVE. Size matters. Examples: 1. LTCM. Hate to beat a dead horse, but near the end, every house on the block was mimicking their trades. However, they were still the biggest market makers in those markets. After they got done fading tails that kept getting bigger, there was no liquidity in their markets. Fed to the rescue. 2. Dennis Levine in Den of Thieves. Insider trader who's Cayman account kept growing an growing. So what did the Cayman bank Prez and brokers do? The same damn trades. 3. Salamon Bros. Their mortgage trading was extremely successful, so other houses bought their talent to do the SAME thing. Bigger profits create bigger egos, also. I see it at the prop firm I trade at ALL the time. Guys have a good week and they think their sh!t don't stink and that they can call the market. Nobody can call the market. Be happy you are profitable, but be vigilent in your work to spot changes in the market. Ego, ego, ego, ego.