At what point is it no longer luck
Hey monkeys, I’m a “day trader”, and have averaged a ~70% return annually for a little over 5 years now. I still have a job (treasury for a regional insurance company) and do the trading (mix of long term L/S, a little options trading, and some shorter term investments) on the side. Would retiring and focusing on trading be a viable path?
My biggest concern is that my investments have been luck, that we’re having a strong bull market, or that I’ll no longer be able to make good investments and screw myself over. Could I try pitching myself to a hedge fund as a trader and show them my trading history? I’ve been feeling increasingly anxious that I make a wrong investment and lose everything, and I’d really appreciate the advice of more knowledgeable people in the finance industry.
Based on the most helpful WSO content, your situation raises some critical points to consider:
Sustainability of Returns: A 70% annual return over five years is undeniably impressive, but the key question is whether this performance is repeatable in varying market conditions. Strong bull markets can amplify returns, but they may not reflect skill alone. To assess whether your success is skill-based or luck, consider:
Risk Management: Your anxiety about losing everything is valid. Even the best traders experience losses, and overconfidence can lead to significant setbacks. To mitigate this:
Pitching to Hedge Funds: If you’re considering transitioning to a hedge fund, your trading history could be a valuable asset. However, hedge funds will scrutinize:
To prepare, ensure you have a clear and detailed track record, including:
Retiring to Trade Full-Time: Transitioning to full-time trading is a significant decision. Before making the leap:
Ultimately, whether you pursue a hedge fund role or full-time trading, focus on building a robust, repeatable process and managing risk effectively. If you’re still uncertain, consulting with a mentor or financial advisor could provide additional clarity.
Sources: Differentiating yourself for hedge fund recruiting (post-IB), How dead is trading?, Overnight 23-year old BTC Millionaire? Life Choices, 34 year old day trader to investment banker, Ask Eddie: Should I Bail On My Trading Job?
Do you have a framework or process that you can explain from first principles to granularity? Do you have a fundamental basis for your trades ie. Forecasting logic? Can you correctly give attribution to your PnL? Have you backtested & found your correlations?
To be honest the main reason hedge funds do not hire layman daytraders is that there is no way to insert them into the business ie. the PM needs horsepower for you to guide or pitch conclusions - day trading has little to no overlap in this area.
further, do you have a sharpe ratio that isnt bonkers?
you may also consider shopping around for a prop trading firm.
I looked into the equation — if chat gave me the right formula and I plugged it in correctly, my sharpe is 1.36.
From what I’ve seen, funds aim for a 2+ sharpe. Is my sharpe high enough to be considered a valid strat?
If you didn't know what Sharpe ratio was before you made that comment youre ngmi
I usually screen for undervalued companies, strong growth opportunities, or exposure to a trend—one of my best trades was buying AVGO, AMD, and NVDA early. I’ll read ER reports, do DCF and comps valuation, and I’ll speak with people in the company I’m considering initiating (I have decent contacts in tech and have gotten some great info and outlook from them).
For attribution, I have estimates, but it’s something I haven’t figure out to pinpoint. I’m looking into back testing rn, it’s something I haven’t seriously considered.
What would you recommend to backtest my strategy?
Not to be a dick, but based on your description it is all luck. Nobody is going to hire you for this.
If you want to quit your job, I can’t stop you, but my recommendation would be to stick with it until you can independently retire.
You have no strategy bro. If you don't know basic concepts about risk mgmt after 5 years of doing this, you are 200% ngmi. Anyone with an ounce of curiosity about pursuing this seriously would have tried to figure out their own risk taking profile long ago. You're a dreamer, not a doer. Which is fine, but you should not do anything to jeopardize your existing long-term career.
So… to be clear your strategy largely boils down to buying NVDA like 5 years ago?
I wonder how his PA looks after July
I have to admit nvda was a big boost to my avg returns, but I sold almost all of my positions at 160-170 a while back. I’m currently up 23% ytd, which is my worst 1H
What are your current bets?
all skill no luck
as for me, i've got a gajillion dollars worth of transactions in the deal flow pipeline
UBS M&A I presume?
Anxiety is for cowards. I believe in you.
my retard friend after buying amd and micron because he thought they were quantum computing stocks
Idk what's worse, what he actually did or that he wanted to buy quantum stocks in the first place...
3 years of alpha
I don’t know but I am hoping for more luck soon.
depends on the number of independent bets you are truly making and how many of them were correct. are most of the wins correlated ideas? (e.g., a lot of ai?) to simplify the math ignore magnitude and think whether the positions truly were unrelated or not. if these are unrelated bets, just calculate the chance you would have gotten these coin flips right. if most of the wins were actually a small number of positions, then this method will also help you ignore that (e.g., if most of it was just one big bet on micron that's cool you made money but it makes it more likely it was luck). this is the simplest method to sanity check. in other words, just look at the overall hit rate and try to see if it is higher than 60% on a statistically significant basis. if you'd like to be more precise, you can estimate the idio win rate as well by comparing to spy etc. over 60% is very high for a hf analyst, but managing your PA is probably 10x easier than this and so it is actually just far easier to be skillful. also, qualitatively, ask yourself: is there an ETF you could have bought to emulate a similar return profile? the more that this is true, the more likely it is that it is not in fact skill but is luck. for example, if an AI or semis etf explains most of the return then it is far more likely to be luck than skill.
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