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

As people know, the industry has certainly become more quantative. I was just wondering if, from a trading point of view, to make serious money nowadays you have to be trading something more exotic. If for example, you were traded pretty vanilla rates, IRP etc. is there still the chance to make good money and more importantly the chance to go over to the buy - side?

Or are Global Macro Hedgies looking towards guys that were trading more exotic products, swaptions etc..

Thanks in advance.

 

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.

 
Best Response
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.

Jack: They’re all former investment bankers who were laid off from that economic crisis that Nancy Pelosi caused. They have zero real world skills, but God they work hard. -30 Rock
 
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.

Jack: They’re all former investment bankers who were laid off from that economic crisis that Nancy Pelosi caused. They have zero real world skills, but God they work hard. -30 Rock
 

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.

Commercial Real Estate Developer
 

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