what returns would top-tier pod PMs generate outside of the model?
Had discussion with friend on this. 2 opposite thoughts. first is top pod PMs (5-7% returns on billions of GMV) are constrained in model so they can make 30%+ by running higher nets, which is the the levered return is anyway - 7x 5% is 35%). Especially last few years where many top pod PMs could have been even more concentrated in NVDA, PLTR, and so forth without having hedges.
Other argument is that the risk model actually prevents the PMs from blowing up and is additive to returns (at least post leverage).
My gut is the top decile PMs can make 30%+ per year. Melvin was the best example until gamestop. the holocene types are mostly neutral so less helpful as example
I love this post because I've been wondering the same. Following.
"My gut is the top decile PMs can make 30%+ per year. Melvin was the best example until gamestop." I agree with this.
Are we saying that owning NVDA and PLTR in size makes you a good investor? Then I must be pretty good since my PA is up big this past year with big allocations to both.
I’ll take a contrarian view - no I don’t think the guy that makes 5% on $3bn at Citadel at 6x leverage can routinely turn $500MM to $650MM with limited leverage. At Citadel, They/their team have to be good enough stock pickers but the risk limits and their ability to constantly move their feet and run a portfolio that minimizes factor exposures is their secret sauce. Take them out of that system and I think you’ll get a mix of good/bad years but nowhere near the risk adjusted returns.
Here’s a (clunky) sports analogy - it’s like if you took a point guard and made him a quarterback. Baseline athletic skills and the general understanding of ball distribution help at both positions. In both cases they play with a round(ish) ball and pass it around, but the risk/reward outcomes are very different (bad pass in bball is at worst a bucket the other way vs a game changing pick six, good pass is a 3 vs TD and large portion points needed to win) and being trained in one does not mean they’d necessarily be good at the other.
This is helpful thanks.
"They/their team have to be good enough stock pickers but the risk limits and their ability to constantly move their feet and run a portfolio that minimizes factor exposures is their secret sauce." what about some of the citadel PMs who got out of the system and seem to be doing pretty well?
This is wrong. The best PMs at Citadel are only constrained by the risk model, but stay there because they are compensated to be constrained by the model. In a sense, this is the price to pay for freedom of capital. If they were willing to raise their own fund and deal with LPs they would have already.
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