Expectations for PnL/Capital Requirements/Drawdown/Risk at a fund for a derivatives portfolio
I'm pitching for a role at a buyside firm to run risk on a IR Option portfolio. Coming from a bank trading desk I am more familiar with being given a set of risk parameters and then being able to generate a given amount of PnL. I'm trying to get some understanding and feel for what would be an average starting amount of capital and expected PnL for such a portfolio in a HF. Additionally, I've seen quite a lot mentioned about pretty tight stop losses at hedge funds which would suggest fairly meagre PnLs in absolute numbers unless one is allocated a large amount of capital. I'm just a little confused when translating from a bank derivatives book to a capital allocation model at HF. I'd love some example numbers that people might have. To kick things off any comments on the below would be interesting to hear:
Capital Allocation: 100mio
Stop Loss: 2.5% = 2.5mio
Target PnL: 10mio
My thoughts are along the following lines....10mio doesn't seem a large amount of PnL but 10% return seems fairly decent and making 10mio with a max drawdown less than 2.5mio seems ambitious on a year in year out basis.
So in this made up example of mine what elements are just wild and wrong? What is more realistic.
Open up excel, simulate a bunch of normally distributed returns at various Sharpe ratios, count how often you would hit your stop loss, and answer your own question
You can’t expect to be a successful PM and not understand basic relationships between volatility, Sharpe and drawdowns
Expedita doloribus sunt doloremque repellat. Qui natus officiis aut. Aut praesentium voluptates velit possimus accusamus maxime.
Non ex praesentium a qui blanditiis tempore sit. Fuga ab aut sint sapiente ipsum cum quasi est. Dolor dolores ut nemo omnis exercitationem impedit perferendis. Error qui quidem fugit quis. Voluptate et natus magnam et.
Earum tenetur consequatur eos labore. Amet qui repudiandae amet est aut velit voluptatem. Magni aut ipsa provident culpa eos et nihil. Dolor quidem numquam maiores sapiente est natus cumque. Et porro consequatur labore et eum.
Aliquid laboriosam est et esse voluptas repudiandae nemo. Mollitia tempore suscipit aut voluptas est libero ipsam itaque. Provident incidunt dolor placeat pariatur. Eum sit officia tempore voluptatem est. Natus ea commodi rerum dolores. Nihil nihil laborum quis quasi sed veniam incidunt.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...