MMs: Drawdowns (Capital Cuts and Stop Outs) & Vol Allocations
A bunch of related questions that I've been asking myself. Assume all questions are for Fundamental Equity L/S pods, unless stated otherwise.
Re/ Drawdowns:
- Q1: Do all major MMs (let's say Top-4 plus the next 5-6 by AUM) communicate drawdown limits to PMs?
- Q2: Are drawdown limits generally communicated and managed as a percentage loss vs. peak GMV, or are there alternative models/metrics?
- Q3: Which of the "Top-10" MMs are more likely to stop out teams before their official drawdown is reached, vs. which firms are more likely to allow teams to go beyond their limit (if any)? (Ignoring the fact that a PM who's good at selling himself will always get more leeway.)
- Q4: Related: When people (e.g.) say that MLP has tighter risk management than others, are those people really talking about the drawdown-% numbers in the PM contract (which to my understanding can be relatively meaningless), or just about how strictly these limits are enforced? (In theory, a MM could fire a PM for any or for no reason.)
- Q5: How does Citadel typically handle drawdowns? Do they systematically cut capital before a stop out, or will they let the PM handle GMV sizing until the bloody end? How relevant are the communicated drawdown limits at Citadel?
- Q6: Out of curiosity: Are non-L/S pods treated differently with respect to drawdowns?
Re/ Vol Allocations:
- Q7: Which of the MMs are known to give relatively low vs. high vol allocations (defined as % of GMV), vs. no explicit allocations at all?
- Q8: Do all MMs use the standard definition of volatility (~"stddev of daily returns") when communicating vol limits to PMs, or are there other popular models used? (E.g., to avoid penalization of winning streaks without having to manually adjust the vol allowance.)
Thanks bros.
This is all specific to (6), Macro:
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Bro he means “overtly dumb stuff as it relates to trading,” not that PMs aren’t allowed to trade
for 3 - do u mean citadel are likely to fire before drawdown limits are reached or they are likely to be more flexible
(probably the former but just wanted to make sure haha)
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