moving from BB rates trading to hedge fund

I would go with #2 now. It would help your asset raising efforts down the line (assuming you can keep up the returns), and I think the prop shop option will always be there for you, so maybe sit on that option for a while.

Unlike most business ventures, I think it is very difficult to return from a "failed" hedge fund for a second go around - so I wouldn't jump at that until you are sure you can raise capital. A track record at a top shop would do that for you.

any advice on how to proceed with #2...getting a real risk taking seat at one of the large macro rates funds?

In your prop-trading, do you trade your views or arb?

In my prop trading...i trade both directionally, as well as curve and butterfly strategies..all in the liquid points. Sometimes I consider it arb, but it not huge balance sheet arb. I trade my views....but i have a model that helps me create / clarify my view. My prop trading is a pretty active day trading style. Some curve / butterfly trades may last up to 1 week. My duration trades last anywhere from 30 min to 36 hours (90% are less than 3 hours). The interest rate market is no longer a mystery to me...its not a random walk. While I don't presume to know where 10yr yields will be a week from now, during the day i am able to spot opportunities where bonds are too rich or cheap vs what stocks have done, or where a large amount of duration has moved the market and I can trade that pretty easily. I'm not looking for trading advice....I'm able to consistently make money being in and out of the market. My problem is that I only have a few contacts outside my firm, and of those contacts, i don't have good relationships.

My dream is to run my own fund with 300-500mm AUM. That would enable me to both trade my views freely, and when i wanted to...to be big enough to move the market and create short covering rallies or long liquidations. If you know what your doing (thankfully, i do.....was not the case 2 years ago)..this is definitely doable. However, few people would believe me..and honestly...if some nut posted what i just said, i'd have a hard time believing them myself. For the moment, just assume that i am a trader who can consistently take money out of the market. What is the next step to run a block of money at a hedge fund. My trading boss doesn't want me to leave, so he won't give me the nod to the bigger fund where has the the relationships that i wish i had. I agree that going to a large fund and running a small slice is the easiest route to be able to get a track record and then raise money for my own firm. I'm pretty brazen when it comes to trading (because I've found how to make money)....but i'm a p*ssy when it comes to asking people for things...like a job, or to manage their money. Looking for advice on how to do that.

In the overall scheme of things, this isn't a bad problem to have.

Have you tried headhunters?

no, i'm pretty hesitant to talk to a headhunter. For starters, i feel as though the headhunters don't really have the respect of traders. And the other thing is, I don't think that fixed income macro hedge funds would be willing to pay the headhunter 30% of what i make my first year....and neither would i.

This is a thread for Bondarb to answer.

Do you have offers from these macro hedge funds? If so, you should definitely go there, build a track record, and with that pedigree you will have a much easier time raising money for a fund.

I may not have been clear....i do not have offers from any of these funds. I don't even have a dialogue. I do however know how they trade, because I see their trades flow thru my desk. I'm hesitant to just call up a guy at one of these shops cold, and say "I'm a trader and i want to come over to trade at your shop....can i have 150mm to play with please." Its a pretty big risk to just make that cold call. I'd rather come in warm. I'm just not sure what the warm tactic is. Like i said in my original post....I'm a quantitative trader...not a people person.

I think you are missing the point. I'm already above "junior trader". I'm up 4mm so far on the year trading pretty small size. I will just trade my own capital at a prop shop before taking a step back like that. I know that i can get a 65% payout at a prop shop...but i would be risking my own capital. While I'm not entirely opposed to this, I'd like to leverage my skills and rather than make 65% of 300k...which would then be 65% of 495k...and so on...But i'd rather make 20% of 40% of 150mm. (thats 12mm for those who have trouble doing the math). I can wait 6 months and get my bonus and then go to a prop shop...but i'm not happy and, as a trader, have been trained to pull the trigger pretty fast on the right opportunity...and the math of leverage says that a large hedge fund will provide the best payout opportunity. This all boils down to essentially just needing somebody to bankroll me....aka invest in my hedge fund (which does not exist).

Yeah I agree this is something that bondarb would be able to answer the best. From the sounds of things it really seems like you are in the wrong seat and you would be better off on the buyside.

Off the top of my head the first thing i am thinking... how much are your current profits attributable to information that you would not have access to on the buyside. In other words are customer flows a big aspect of your style which you mentioned you do get to see.

PMed you

so i've been doing some reading and thinking. Maybe I'm going about option #3 all wrong. I can outsource the capital raising portion of starting my own hedge fund to

a) cap intro from my soon to be prime brokers b) fund of funds c) 3rd party marketers

I know that of these, #3 is the most painfull...as they take about 20% of the mgmt fee and 20% of the performance fee. I suppose i could live with that, so long as, if i start anther fund..i'm not indebted to the 3rd party marketer for life.

I'm wondering if the cap intro team from my soon to be prime broker would really be able to get me the AUM I'm looking for...being as I haven't even opened up shop yet?

I know that starting my own fund is the ultimate high risk / high reward proposition. Almost none of my prop trading money comes from the flow my desk sees...or other information that I only get from being on a market making desk. Thats why i'm so frustrated with my current situation.

Anybody have experience in the capital raising aspect of starting a new fund? I did a little math..and my goal is to get 25mm in AUM before leaving my current seat and starting my own fund. Is it possible to do that while at the same time trading in my current seat. I suppose the real question is...will i be able to keep this activity secret from my trading boss until is time for me to leave? If i were a potential investor, i would probably want to ask my current trading boss what he thought of me...and that would pretty much let the cat out of the bag.

Anybody have a good referral for a 3rd party marketer? Which firms have the best Cap Intro for new funds?

Few things:

• Number of people on this site who can give you relevant advise: less than 5 (and that's being bullish).

• what part of the curve do you trade? if you're a front-end guy, your situation is completely different as someone trading the 5y box (guessing you're not the 10yr guy and you are definitely not the long bond guy)

• if you're THE off the run guy, start a dialogue with the rel val funds

• don't start your own fund

• if your book pnl is 4MM this year, i don't know how much of a hot commodity you're going to be

• you should at least know the players at the fast money shops who punt with you; start grabbing drinks with them, w/o sales guys - come armed with a couple really strong trade ideas and run through them

• prop guys are worth a look but make sure you understand it's a one-way street - once you're there, it's a tough slog coming back

i agree...this site seems more for college students...however...

I'm not a front end guy...i mostly trade the belly of the curve but i trade bonds from time to time. Consider me a swing trader as far as what sector i make markets in. I'm not "the" off the run guy...to be honest...i only trade off the runs from a prop perspective when all the stars align...which is not very often. Of course from a market making perspective i trade them every day..i just try my best to be in and out.

My P&L of 4mm is based off taking less than 30k of prop risk. Thats not a lot for a BB market making desk. You could say i'm pretty junior in that regard. The larger guys have positions that are normally in the 200k - 500k range. My 4mm of P&L could just as easily been 40mm if i traded the same kind of size that the more senior guys trade (this is all liquid stuff...so i know the liquidity is there...i'm just not allowed to increase my risk size). Assuming i just traded the same positions i do now but with larger size (10x would be easy), being up 40mm halfway thru the year this year in rates would make me a top performer on the street given no free P&L from flow. Its frustrating to see my low P&L and high sharpe ratio not getting any respect because i'm young. Thats total agism...but i know i'm supposed to just eat that.

I think you're right about the prop shops....it is a 1 way street as i would probably burn some bridges by leaving the bank.

I appreciate your response...

So you swing intra-day and do rel-val on off the runs? Do you make any pnl on basis, swap spreads, front ends, funding trades, etc.?

Look, I'm not taking anything away from you. But when your senior guy steps in and shows a 1000x up locked on 10s, your sharpe is going to look a lot more attractive. Or how about when he has to bid through offer side to get that tier 1 biz? You get to side step all the sprays, drive-bys, and other shenanigans that go on in the name of "franchise" - it's the classic treasury trader dilemma. If you really are as good as you say you are, I'm surprised you're not getting more interest. Either you're not that good or people don't know it - learn to market yourself better.

I would say that the macro fund route (#2) is the most likely. However, even to succeed in this path you are going to have to market yourself...no fund is going to find you hiding at some bank trading your small prop book. Get a story about yourself together, along with a track record if you can produce it, and start reaching out to people....headhunters, clients, friends, whatever. I also agree with the above poster who says that sell-side and buyside are much different games...but thats fine, it doesnt mean you cant make the move. Get to work!

more specific advice: first step: get your resume and track record ready. second step: come into work on a saturday and hit bloomberg JOBS third step: send resume and track record to every headhunter listed on bloomberg that claims to place people in the hedge fund industry. fourth step: wait for response/feedback.

this is a good way to start,

I'm still confused why you don't just go out more with your fast money clients. I do not know a single sales guy who will ever get pissed that their traders are proactively going out with their accounts.

Here is a dirty little secret - your sales guys secretly want you to go to the buyside - they don't give a shit about the desk's pnl, they just want to rack up the SC and market share.

Sorry for the random postings but thoughts keep coming to me - 5 years is generally the inflection point for a guy in your seat. If you're trading 5s, you can easily go to another shop w/ a guarantee. Get some serious balance sheet, get the go ahead to run some serious 01 and get some experience bidding through the offer side for PIMCO with the market moving away from you. You will both be taken much more seriously and be a better overall trader.

bondarb - i know some firms HR actively screen bbg pulls for the notorious JOBS. just a fyi.

thanks for the advice guys - will do a few of the things you mentioned and let you know how things turn out. And regarding your namesake...given what the curve did today (risk reduction day in front of greek confidence vote and bernanke)....i think its time to put on the 5/10 flattener (i think it was at 144 at the end of the day)...positive carry and at the recent steeps. Will also get 10% long against this position.

anyway, thanks and see ya

I'm going to have to throw in a n00b question with the slight possibility of temporarily derailing the thread, but I just can't seem to answer the following question:

What exactly do you guys mean by curve?

Yield curves for treasuries, bull/ bear spreads between expiration months for futures or anything else?

Yield curve.

Good luck fighting the 5s. Play the resistance if you want but that bid has been unstoppable.

The 5/10 flattener was a very crowded trade. I put some on today as the curve steepened (close to the steeps for the last 2 years). I've learned to be like warren buffet...just because the market is willing to sell you the company you bought yesterday for less than you paid yesterday doesn't make the company worth less..you just get to pick up more shares at a better price. I think this should work out ok....scooped up over 1 bp by the close today...and i think there are 5-8 bps to be made before month end. Don't have any other trades right now. Ok, not totally true...but the other trades are in off the runs and they don't count because i would never waste the balance sheet.

And just for the naysayers....yes, i understand that with the fed on hold for an indefinite amount of time, the front end of the curve will continue to flatten...which will be negative for my trade as some mysterious hand buys the 5yr point. But that should be mostly contained to 2/3's (i would not fade the 2/3 flattening). Its also why i am long against the position, as there is a high degree of correlation between the 2.

One more thing....when these correlation trades move around....that is an opportunity to take off 1 leg (usually the duration leg)....You get a pretty cheap option to trade around some duration with this position.

anyway...good night and good luck trading.

I would certainly go with #2 if I were you. #3 is very hard these days. Was easier in the past to be a star prop trader and get someone like your bank to seed you for a large amount. These days much of the business is about raising money more than it is about managing money. #1 is not the right choice for someone in your position and with your skillset. #1 is also a very risky option. I somewhat know what its like to be in your position. I trade rates in a quantitative manner as well, on the buyside and my p&l/dv01 similar to yours with a very high sharpe. If you want to run your own book in this stuff at a hedge fund it will take a few things:

1. track your p&l diligently. track returns based on a capital base that is realistic and directly comparable to a hedge fund environment. if you have this historically for a while - great. they will want to see anything from 1yr-3yrs at minimum. Longer the better. they will also want to see that you can repeat this strategy in a new environment with new systems and sometimes drastically different slippage/commissions/spreads. Does everything break down when you have to pay away and extra 1/8 on 5s or whatever?
2. contact headhunters. there are many but some you will click with and get your strategies and product - use them. they have hooks into all these large funds you mentioned. but dont rule out the smaller ones you never heard of. doesn't matter as long as they can give you enough capital and they are going to be around for a while.
3. if a hedge fund wants to hire you, get a deal/contract. this is imperative. don't rely on discretionary comp/generosity. i am learning this the hard way.
4. speak to buyside traders. personally i am acquainted with a dozen sell side firms and their rates sales desks. when i go out with the sales guys i insist they bring a trader or two, and many times even specify which one. there is absolutely no reason why a smart buyside trader who gets your trading style would not want you to join him/her at the fund assuming there is capacity/capital to trade. at the very least you get to pick their brain and they get to pick yours a little.
5. lastly how are you trading so much prop, staying flat on your flow book and still holding your job? yes prop is supposed to go away, but i'm not that naive. it is still rampant and disguised better, but i find it hard to believe it will go on much longer. i would be a bit worried about this if it were you, and start your search sooner. strike while the iron is hot.

agree 5s10s should flatten into next week's supply, maybe 5bps in the trade. if you trade tips, tomorrow about to be an exciting day.

hahaha you bond guys lost me but this is a great thread! Need to see more of these on WSO!

banktrader48:

My prop trading makes about 40% return on capital....but i won't get paid relative to that because i don't have a large capital base for my prop trading, and I'm really supposed to be making my money as the market maker for a large book that i manage. (i essentially prop trrade on the sly)

supposed to be making my money as the market maker for a large book that i manage... Get it !

Impressive track record is needed for 1)

Good luck, boy

how did you fare through the 5s rally on Friday?

This is a great fucking thread for us market geeks. Curious to know what happened to the OP.

Sorry to hear that and best of luck going forward. I thought you were a Treasury trader - how did that become the most illiquid product?

All US treasuries are NOT created equal. Only guys who are really involved in the off-the-run business will understand this.

what are the other flow traders who were let go doing now aside from trading their own capital? (the non-superstars)

Banktrader48, take the GMAT and apply to top business schools. For talented traders, it is by far the best way to make the transition into the buyside or something more interesting.

the other flow traders who were let go either...

a) are trading their own $$ prop b) found mm seats at other ibanks c) went to trade at a hedge fund d) got a job in sales e) got a job as a broker because they were unable to do a thru d f) have disappeared off the face of the earth

any of the more experienced guys on here know how to make contact with the multi-manager macro funds (such as millenium) without getting laughed at?

govttrader:

any of the more experienced guys on here know how to make contact with the multi-manager macro funds (such as millenium) without getting laughed at?

nobody at millenium will laugh at u...they want to talk to everybody as their strategy is all about hiring PMs en mass and churning out the ones who dont cut it. i seriously would consider just calling their office and asking who is in charge of hiring new PMs because you'd like to be considered....at alot of places that would be insane, but at millenium i think it would work because my imporession is that they want to see as many resumes/track records as possible.

This post is exactly why I'm worried about my prospects of sell side trading: low career stability, lack of xferrable skills/pigeon holing, emphasis on market making/franchise rather than prop pnl especially when it comes to bonus season, regulation and capital reequirements, difficulty of transitioning to the buyside, hard bschool sell

It seems like the emphasis at banks has shifted away from traders and more towards building the franchise (sales) and IB. Why pay the trader who brought in 50 M in prop when he's going to leave for a HF/trade house the next year or Dodd Frank/reputational risk is going to cut back prop trading/ Basel X is going to make that 50 M in prop much more costly with respect to RWAs

Swinging for the fences and hitting a home run no longer sets you up for life but maybe doubles your bonus. Also, is it me or does management (desk heads that no longer trade) not add enough value to justify their paycheck? It seems like outside of the prop element of trading, the other "skills" can be picked up rather quickly, so how much is your experience really worth when you bank can just pick up that freshly minted undergrad/MBA for a fifth of what they're paying your unmotivated ass. Age and experience seems to garner respect/add true value and warrant another 0 on your paycheck in IB, consulting, medicine, law... but on the trading floor, you're considered a dinosaur.

Am I being overly ranty and pessimistic or are there some elements of truth here?

There are some elements of truth here.

Just read through this, lots of great information. OP's story is very interesting, as he's kind of in a position I'm hoping to put myself in in the next 5-7 years.

Comment above was made about adding an MBA in order to make yourself more presentable to buyside firms in general...is this really considered to be the thing to do? I was always told that there's trading, and then there's everything else, in a sense. Once a trader, always a trader. Unless you make it to the buy side, in which case you're so good anyway that an MBA is beyond useless for anything you will likely be doing day-to-day. I'm currently in the process of looking for/applying for opportunities next summer, and as I've always been an amateur trader, I am heavily leaning towards an S&T/prop trading type position. I have graduated, but have not found FT employment yet. One idea that ran through my head was attempting to pick up a summer stint and also apply to B-school this fall as well, so that if things don't work out, I at least have the potential to add to my education. My ultimate goal is also to make it to an HF at some point. Is an MBA really helpful for anyone coming from trading?

Definitely one of the better posts I've read through on WSO

the amount of misinformation on this thread is stunning. go to b-school is the best way to go to the buyside??

-- if you can't talk to guys, you won't make it in this business. sorry. the myth of the lone quant genius sitting in the dark doesn't exist anymore. this is still a people business even in the most ruthless, cutthroat hedge fund out there.

-- sounds like you got shafted at the worst time. off the runs have been absolutely abysmal to be a mkt maker.

-- i won't comment on specific funds but you're better off going to a smaller fund. lot of reasons for that.

This is more or less correct. The changes happening to BB trading are structural; it's not merely cyclical.

I know a ton of traders who are now applying to business schools whereas say 6 or 7 years ago, that would have not been the case.