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
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