Forward growth of Prop vs HF
2020 was a banner year for most prop and market making shops. They put up some mind blowing numbers (Citadel Securities making 6bn, Jane St making >8bn). These revenue numbers are more than a majority of hedge fund AUMs.
Are prop shops and market makers the place to be going forward and is there something structurally wrong with the HF model and incentive structures? Clearly prop is more aligned and you would think traders in that space would be more thoroughly vetted and monitored as to not blow up.
I’ve been at blue chip MM platforms for the past decade and to be completely frank I’ve been sorely disappointed by the quality of PMs I’ve encountered at the platforms. Most are charlatans and it’s not surprising why they get canned so quickly.
Given that I’m quantitatively oriented I’m wondering if the market makers and prop shops are better places for long run career stability than MM platforms. Would be interested in hearing other thoughts.
> long run career stability
> prop and MM HF
No, both will probably perform similarly in the long run. You are cherry picking the best performing prop firms in the best year for prop firms and extrapolating their revenue. Citadel (the hedge fund) has probably been clearing around 3-5bn in revenue the past few years (~5-8% management + 20% performance fees), much more than the revenue of the majority of prop trading firms or aums of most hedge funds (duh). Also the incentive structure for prop-traders is often the same as the incentives for a PM at a platform -- you still just get a cut of your pnl.
Appreciate the insight. I’d challenge the Citadel HF numbers slightly. If they were running around 20 yards on average over the past 5ish years, on an excellent year (~15% returns) they would probably generate around 1.5bn in revenue (600mm in performance fees, 1bn in management fees). Citadel Securities seems to be clearing twice that on a regular year with 1/3 the headcount.
Agree I’m cherry picking last year to some extent, but it does seem like when you compare HF vs MM like for like MM might be a structurally more profitable business.
Besides being more "sell-side", there is no major difference in structure when we talk about "alpha" strategies. In both cases PMs/QRs/Traders get compensated as a % of PnL plus some constraints (in some cases factors, in other cases pure Sharpe, in other Sharpe + leverage, etc.). So, the business model is the same -- to hope that your traders make more than they lose. Plus, in the case of Citadel, I think they deploy many good quant strategies straight to the Securities business to make more money for themselves which boosts the revenue instead of having investors.
Good luck getting paid at a market maker. The only reason you're making money on Citadel's desk is because of their infrastructure. Even the semi-automated and discretionary desks. Ken knows this and keeps the vast amount of profits from the securities business. Pays the minimum he can for people not to quit.
If you don't mind can you expand a little more on this?
Cit Secs makes money because of the flow only it has access to. This is proprietary to the firm and to KG. Not because the trader is talented or gifted (with exceptions). Toll booth clerks don't get paid fortunes for the same reason, even if the highway company mints money.
What is this infrastructure exactly?
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