Do you have to sit on an exotic desk to make money?

Swaptions ain't exotic. The answer to your question is no, although things do vary a lot. You don't need to do exotic things to make money and certainly not for global macro.

On a flow basis, you make money when you execute a client trade in an illiquid product with a wide two-way (most exotics count) and hedge it with liquid products with tight two-ways and pocket the difference in vol as your initial PnL.

On a prop basis, exotics aren't really the greatest tool for expressing directional views because they are expensive to get into and out of. However, there are certainly opportunities to spread them against other exotics or against vanillas when they come about.

Revsly oSnap:

On a flow basis, you make money when you execute a client trade in an illiquid product with a wide two-way (most exotics count) and hedge it with liquid products with tight two-ways and pocket the difference in vol as your initial PnL.

On a prop basis, exotics aren't really the greatest tool for expressing directional views because they are expensive to get into and out of. However, there are certainly opportunities to spread them against other exotics or against vanillas when they come about.

You might book up PNL trading exotics, then bleed over the life as you try to keep your book hedged, so there are two sides to the coin.

As far as your comment on Prop, I completely disagree. Exotics allow you to customise and tailor a payout to a precise view. Effectively, this gives you increased leverage you wouldn't be able to find in the vanilla market. Yes, their may be increased B/A, but I'd argue the ability to inject leverage generally outweighs the cost of entry/exit.

I agree with the first part. For the second one I kind of agree with both of you, I would argue that you need to value that literally on a case by case basis. There are many exotic strategies that are academically/theoretically good but lose a lot of profitability due to b/a, skew or even lack of liquidity to do the size you need. Besides, most HF need to deal with liquid products due to their inherent leverage, proof is that most exotic and structured desks don't really have fast money clients and are more about pension funds or corporates and bespoke solutions for balance sheet purposes and stuff.

A pretty significant portion of the FX exotics market is hedge funds.

"most exotic and structured desks don't really have fast money clients"

Can't speak much about exotics, but I'll say there are as many or possibly more fast money clients than real money for structured desks.

Might be different for FX, but in structured credit and rates there's very little HF activity.

My desk is made out of polished organic Chinese bamboo crafted by underpaid and overworked children, which certainly helps me make money, but I don’t sit on it – bamboo isn’t the strongest wood – I sit at it.