Top Prop/Hedge Fund Traders Strategies (Discussion)

So I've been in the trading industry for 6 years now. At some point in the future, I want to transition to prop (I have a strategy) and I'm not talking about Market Making. I'm talking about actually managing a discretionary book to generate alpha... like a portfolio manager.

Anyhow, we've all heard of Adam Guren, who used to work for FNY Securities and now he runs his own hedge fund. He came straight out of school and went to go play semi-pro soccer and joined FNYS afterward. He never worked on any trading desk at an investment bank or a large Asset Management for that matter. In one of his old interview, he said he trades based on intuition (as do I). I'm going to assume he knows when to buy or sell when the market is relatively cheap or expensive.

So does anyone know if he's all discretionary? In one of Glassdoor review for FNY, a guy wrote "You can't look over someone's shoulder every time and watch if a $60 stock moves 30 cents"... Not word for word but close to it. With that being, I assume FNY is a short term trading shop. At one point he made over $5MM in one year. That is over $20,000 a day, assuming there are 252 trading days a year. FNY is very risk adverse because they trade their own capital. So how could anyone who trade equities make that much in a single day, consistently?

Also Jennifer Han, hedge fund superstar that made arrow hawk, 18%. She had her own hedge fund but it went bust, but not because of a huge loss but due to a redemption. Prior, she worked for MS and BAML commodities desk... if I recall correctly. She got picked up by Millennium immediately after. Her strategy is on the basis of relative value on commodities.

So with that being said, investment banks doesn't teach you strategies, so how could she go into a fund and kill it? I assume this is a strategy she developed?

 

FNY also has a large number of groups that fall under their name. As @mswwonc noted each of these groups trade different products with different time horizons. Some of these groups go flat every night while others may hold a position for a day or two etc.. It also important to note the type of leverage you can get intraday vs if you hold over night.

 

if you have been in the industry for 6 years, then you should have some kind of track record. Either you have an actual PnL, or you are in sales / strategy / research, and you make trade recomendations, and your recomendations can be tracked to create a paper-trading portfolio PnL.

So, first, what is your PnL / track record? (yearly, or however best describes your journey...)

your answer to this question will determine how you can proceed.

 
Best Response

I'll get to that and I really appreciate your help, but in the meantime, I'm not asking for any advice on how to move to prop. But what I will say is that my strategy that I developed is not scalable to run a large book. So really, what I want to know is, how can someone like Guren who I "assume" is running a 20mm book make $30,000-$40,000 a day consistently, just trading equities, given the risk limits mandated by FNY? I mean to make that much, he's taking huge risk and he's trading on what... "Intuition"...?

And Jennifer Fan... She's a relative value trader, market timing for her needs to impeccable. From what I heard on the street, she is running a 200mm book (ALL BY HERSELF)... And she is trading commodities so on a given day, she can be down by a significant amount, in the case she is wrong. When she was a trader at the bank, no one taught her to prop trader. Maybe it's a dual combination between intuition and her stats degree from NYU and she was able to make a strategy? I mean no one taught her anything.. Can you agree she developed a strategy on her own. What skills you think was transferrable when she moved to the fund?

 

we don't know exactly how a persons market intuition develops...but for most, its a combination of exposure (seeing lots of different things) and mentoring (more senior people who have figured things out teach their juniors). After some number of years, the combination of these 2 things, combined with your own insight that you develop over time, coalesce into your own personal trading strategy / style.

its different for everybody, but these elements are the foundation. When you develop a way to look at the market that makes sense to you, and the market confirms your view/strategy....it just makes sense. If you don't have this gut feeling that is confirmed by the market, then you just aren't there yet.

Once you do have this strategy confirmation, then you can scale it up and trade it in much larger size to the point where you dominate a market...and that can be into the billions.

 
mswoonc:

I'll get to that and I really appreciate your help, but in the meantime, I'm not asking for any advice on how to move to prop. But what I will say is that my strategy that I developed is not scalable to run a large book. So really, what I want to know is, how can someone like Guren who I "assume" is running a 20mm book make $30,000-$40,000 a day consistently, just trading equities, given the risk limits mandated by FNY? I mean to make that much, he's taking huge risk and he's trading on what... "Intuition"...?

And Jennifer Fan... She's a relative value trader, market timing for her needs to impeccable. From what I heard on the street, she is running a 200mm book (ALL BY HERSELF)... And she is trading commodities so on a given day, she can be down by a significant amount, in the case she is wrong. When she was a trader at the bank, no one taught her to prop trader. Maybe it's a dual combination between intuition and her stats degree from NYU and she was able to make a strategy? I mean no one taught her anything.. Can you agree she developed a strategy on her own. What skills you think was transferrable when she moved to the fund?

First: Jen Fan worked at Arrowhawk and Arrowhawk failed to raise enough money and shut down. She then started her own fund (cant be bothered to look up the name), her own fund shut down due to it being down 5-10% in her two years.

That aside, who says that if your at a bank you cant learn to prop trade. Banks had alot more flexibility prior to the GFC. MS in NY has a big commodities team and they do prop trade to this day. They also do lots of physicals, and if you understand how the product flows and regional S&D balances you can translate that into financial trades.

"no one taught her anything"...........did she tell you this?

You are correct that your timing has to be impeccable if you are just taking out flat price risk. However many who trade commodities - trade spreads. For example if you know that that production in the Permian is going to pick up and associated gas will cause a regional surplus, as there might not be enough takeaway capacity to move the gas to the gulf coast. Your trade might be short Waha and Long other regional benchmark (credit RBN). Benefits of this kind of trade: Less risk and you dont care what the price of gas is but rather what the spread is.

 

The founders of the different funds: Ken Griffin at Citadel David Shaw at D.E Shaw James Simmons at RenTec etc Henry Swieca and Glen Dubin at Highbridge

Note, however, that these aren't necessarily the pms.

 

What exactly are you asking?

Are you asking how traders develop an edge? It's different for everyone. You can read about many different ways in the market wizard books (in fact, the latest one has an interview with a FNY trader)

 

Fundamental Shops are almost entirely driven by some of that analysis. At least mine is. The best person for HF work of that sort is someone who can absorb lots of information, network well, think about financial topics, and jump from topic to topic. A synthesizer or industry expert, if you will. For the short term, you have to tell me if a decrease in a given macro number will affect Intel's share price. For the long term, you have to tell me how Intel can grow, what its risks are (what the risks to the stock are also), how fast can it grow and a whole slew of more minutae oriented things. Then you have to have the balls to come up with a recommendation.

The ones more driven by events and M&A are very focused on business style and strategy, especially where management is concerned.

"Dude, not trying to be a dick here, but your shop looks like a frontrunner for the cover of Better Boilerrooms & Chophouses or Bucketshop Quarterly." -Uncle Eddie
 

You are asking an unanswerable question really, if you want to know how a person developed a strategy then you need to ask that person or someone very close to them.

But I would say this: -20k per day is not a huge PNL sigma for 1 trader. 5m per year PNL on a 20mm book is 25% without leverage (and im assuming there is leverage on top of that so the unlevered return is lower). Great return, but certainly not even close to unbelievable, especially on such a small base (obviously gets harder to make large returns as capital increases).

-Running a 200m book by yourself isnt crazy either, Ive seen much much bigger than that.

 

Strategies/styles fall in and out of favor. As funds put up big returns, others try to emulate them and outsized returns are harder to come by, until they are no longer hot areas and returns grow again.

Read "More Money Than God" which details this history of HFs and how they came in and out of favor.

No, there are no strategies that are easier or harder to raise AUM. I could guess that the biggest % of capital goes to L/S equities, but it is a very crowded space.

The most popular strategy among HFs are aimed at buying low and selling high. Some try to sell high and buy low.

 
grosse:
The most popular strategy among HFs are aimed at buying low and selling high. Some try to sell high and buy low.

Good one. +1

CNBC sucks "This financial crisis is worse than a divorce. I've lost all my money, but the wife is still here." - Client after getting blown up
 

Like others have said, the numbers aren't anything to write home about, really... I don't know anything about the people in question, either.

In terms of how managers develop their skills, most commonly it happens the same way as in all the other professions. Namely, through an apprenticeship. Alternatively, it can also happen by trial and error, but that's much less likely to to produce a positive outcome.

Not always...if you focus on certain segments the delay actually helps..check our a site called "insider monkey" -- their strategies discuss this. They have a section on marketwatch that discusses where to focus on..pretty interesting.

 
trazer985:
you also don't see their hedges. This is the equivalent of looking Gary Kasparov's moves on a chess board, copying them and losing, and wondering why you lost. DONT BUY WHAT YOU DONT UNDERSTAND

Very good point. No short positions are disclosed either (at least in the USA...). According to a friend in the industry, sometimes a fund will buy shares of a company while shorting it just to "reserve" the right to short it while making up its mind.

 

Jim Chanos recently talked about why he thought it was stupid. My thoughts:

  1. Most funds short to hedge positions; 13F's don't need to disclose short positions. Ergo - is it just a hedge?
  2. It might be worth it for investors with long-term horizons. I like reading the 13F's of good value small-cap managers
  3. Pabrai once argued for looking at 13F's for ideas; considering these are pros, they really can't afford to lose a bunch so they've probably done good downside analysis.
 

I've been a prop trader for 11 years. Edge can be gained from implicit learning watching markets every day for years and years. I'm not aware of any books that can explicitly explain how to trade successfully. Good traders can synthesize information, compare it to past experience, and then act. Perhaps more importantly, during completely new scenarios where there is no road map, they can deduce what is likely to happen. Peter To kind of touches on it starting at minute 54 in this podcast: https://chatwithtraders.com/ep-098-peter-to/

 

That is correct. Most funds have a max amount of the daily liquidity under which they want to remain. that amount differs by fund and others can weigh in but i'd say rule of thumb is 10-15%. you are correct in saying the reason is to avoid moving the price. The other issue to consider (and potentially the bigger concern) is on the back end. If an investment goes against you, you don't want to dump a huge block of shares and drive down the price. Better to sell into available volume.

 

Yes, this is correct. We look at the total # of shares trading per day and total $ value of shares trading per day which is what @"White Collar" referred to as liquidity. For a stock like Apple which trades $6B in shares per day, we would be less concerned about executing a buy/sell order because we know that the trade will executed close to market value. For a small-cap name that only trade $3M a day, we would have to trickle in over several days / weeks as to not cause a spike in price (raising our own cost basis).

 

Yes, this is correct. We look at the total # of shares trading per day and total $ value of shares trading per day which is what @"White Collar" referred to as liquidity. For a stock like Apple which trades $6B in shares per day, we would be less concerned about executing a buy/sell order because we know that the trade will executed close to market value. For a small-cap name that only trade $3M a day, we would have to trickle in over several days / weeks as to not cause a spike in price (raising our own cost basis).

 

If I am permitted a bit of cynicism, finance ain't exactly rocket science/brain surgery. It's all much of a muchness, IMHO.

One thing I would say is that it's much more common for people doing credit/equities/etc to get involved in macro, but not the other way round. This may not necessarily be because they have the requisite skills (although they may think they do), but that's my observation.

 

As an FYI, ranking hedge funds with different strategies based on absolute return is not an accurate way to guage funds. Even within the same strategy, the amount of leverage used by a given fund will have a dramatic effect on returns (i.e., risk-adjusted returns). Additionally, there are many funds that are solely interested in doing true "hedging" (e.g., portfolio insurance) and target low, stable or counter-market rates of return...

 

Dude mutual funds may only take 1%, but in the case of large funds with 50bn in assets that 1% is a very sizeable sum (500m in that case)! Its a business with significant economies of scale and thats why mutual funds are focused mostly on ramping up assets while maintaining OK performance.

Hedge funds take 2% of AUM and 20% of returns. Considering a relatively large 2bn fund might have only 80 employees or so its not hard to see how this fund could make some serious cash if they have an "OK" +15% year (40 mil fees and 60m incentives means 100m spread over 80 employees. taking out operating costs probably 1m/person to disburse).

 
secretariat:
Considering a relatively large 2bn fund might have only 80 employees or so its not hard to see how this fund could make some serious cash if they have an "OK" +15% year (40 mil fees and 60m incentives means 100m spread over 80 employees. taking out operating costs probably 1m/person to disburse).

80 employees!? That is a lot of people for $2B AUM.

 

Exactly....especially when investors pull out in a recession and your AUM gets hit not only by losses but by redemptions. AND you will typically have a "watermark" that you need to exceed (typically you need to earn back what you lost) before you can earn more incentive fees, which can cause the few personnel you don't have to fire to flee anyway. One bad year can definitely kill a good HF.

 
maxc:
I don't want to disclose too much but

20B fund 30-50% return last year 100 employees.

You do the math.

What 20B fund returned 30-50% last year? That is ridiculously high. I thought Tepper at Appaloosa did the best last year, but his fund is much smaller than that.

 

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