Personal Account: How to size a trade
TLDR: How do you size a trade at a HF or for your personal investments?
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Recently, one of the stocks I bought has a 60%+ return. While not catching the entire 60%, I am happy to get about 50% of the upside. Meanwhile, I cannot help but think how much more money I would have earned if I turn this #2 bet into my #1 bet that is about -15% YTD. The gain and the loss from each other roughly cancels out.
One thing I told myself before starting to invest/trade seriously for my PA this year was to have capital discipline. I don't come from a wealthy family and it took me a few years to accumulate a small amount of starting capital.
However, I cannot stop thinking: what if? Why didn't I? To be fair, I put all the available cash I had into my #2 name. I think another lesson learned here is to have a narrow, concentrated scope of stock names to cover by myself since my #3-6 names are all lagging YTD.
As I am writing, one thing I learned from betting heavily on my #1 name is to have cash
available during market turmoil and learn to detect better buy/sell signals. I am mostly a fundamental guy and I am proficient enough to write code to analyze data, if that makes sense.
How do you do it?
Based on the most helpful WSO content, here are some key insights and strategies for sizing trades, whether at a hedge fund or for personal investments:
Capital Discipline and Risk Management:
Conviction and Scaling:
Liquidity and Market Conditions:
Scenario Analysis:
Concentration vs. Diversification:
Cash Management:
Behavioral Discipline:
Leverage Data and Tools:
Learn from Experience:
In summary, trade sizing is a balance of conviction, risk management, and market conditions. By maintaining discipline, leveraging your analytical skills, and learning from experience, you can optimize your approach and improve your long-term performance.
Portfolio management is more of an art than science given its multiple dimensions (you have to be forward looking on asset volatility, returns, and correlations).
But my advice would be to simply blend your highest conviction names with SPY => resulting in an active risk approach. That way if your thesis is wrong, you still track the market and limit downturns on the idiosyncratic names.
In terms of sizing the portfolio, a good start would just be risk parity +/- 5-10% of active tilts (you could probably code this in Python or rely on a Python package) .
Make sure that the asset weightings spit out by risk parity makes sense to you intuitively.
If not, then that’s either because of the data (maybe some names have too short price history) or you need to trim your selection of names (ie some names have really high correlations with each other, resulting in unintuitive sizing with risk parity).
Thank you. This is actionable advice.
The 2nd quartile best HF PMs in the business still sucks at sizing. It's incredibly difficult.
For someone in your position, frankly the best way to go is probably to size each position equally. Maybe just leave smaller sizing tier for super speculative stuff, and the rest all equal-sized.
Also, you need to understand that in this business everything seems obvious in retrospect. But you can't beat yourself up for missing this or the other trade, or you'll drive yourself insane.
I would contend that even the top quartile suck at sizing, excluding the luck factor.
Have to get in the reps and figure out what works best for you over time. I started loving the public markets in 2015, first year of college. Never worked in hedge funds -- mainly in top SF startups, but my true passion was investing. Last 6 months, made life changing gains on $APP because I was failing in my other solohacking entrepreneurial ventures and had no other option but to go all in (I also don't come from money so $APP literally saved me). Of course, I could've easily been in ruin but I had the conviction/delusion that I knew more about the company than 99% of the world/investors (I'd tracked it since late 2023, and became obsessed with it to the level Burry was obsessed with the housing market).
As Druck said, you have to press the bet. Of course, it was a lot of luck, but I'd err on sizing big and gaining the conviction to go big. Good luck.
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