Top Prop/Hedge Fund Traders Strategies (Discussion)
So I've been in the trading industry for 6 years now. At some point in the future, I want to transition to prop (I have a strategy) and I'm not talking about Market Making. I'm talking about actually managing a discretionary book to generate alpha... like a portfolio manager.
Anyhow, we've all heard of Adam Guren, who used to work for FNY Securities and now he runs his own hedge fund. He came straight out of school and went to go play semi-pro soccer and joined FNYS afterward. He never worked on any trading desk at an investment bank or a large Asset Management for that matter. In one of his old interview, he said he trades based on intuition (as do I). I'm going to assume he knows when to buy or sell when the market is relatively cheap or expensive.
So does anyone know if he's all discretionary? In one of Glassdoor review for FNY, a guy wrote "You can't look over someone's shoulder every time and watch if a $60 stock moves 30 cents"... Not word for word but close to it. With that being, I assume FNY is a short term trading shop. At one point he made over $5MM in one year. That is over $20,000 a day, assuming there are 252 trading days a year. FNY is very risk adverse because they trade their own capital. So how could anyone who trade equities make that much in a single day, consistently?
Also Jennifer Han, hedge fund superstar that made arrow hawk, 18%. She had her own hedge fund but it went bust, but not because of a huge loss but due to a redemption. Prior, she worked for MS and BAML commodities desk... if I recall correctly. She got picked up by Millennium immediately after. Her strategy is on the basis of relative value on commodities.
So with that being said, investment banks doesn't teach you strategies, so how could she go into a fund and kill it? I assume this is a strategy she developed?
FYI FNY Securities doesn't just trade U.S. equities, they trade international equities, rates, fx, credit, derivatives and etc... but I think Guren was dedicated to equities.
FNY also has a large number of groups that fall under their name. As @mswwonc noted each of these groups trade different products with different time horizons. Some of these groups go flat every night while others may hold a position for a day or two etc.. It also important to note the type of leverage you can get intraday vs if you hold over night.
Right and overnight leverage I believe is 6 to 1 and intra-day is a lot higher, obviously... but kindly speaking, can we stay on topic, thanks.
if you have been in the industry for 6 years, then you should have some kind of track record. Either you have an actual PnL, or you are in sales / strategy / research, and you make trade recomendations, and your recomendations can be tracked to create a paper-trading portfolio PnL.
So, first, what is your PnL / track record? (yearly, or however best describes your journey...)
your answer to this question will determine how you can proceed.
I'll get to that and I really appreciate your help, but in the meantime, I'm not asking for any advice on how to move to prop. But what I will say is that my strategy that I developed is not scalable to run a large book. So really, what I want to know is, how can someone like Guren who I "assume" is running a 20mm book make $30,000-$40,000 a day consistently, just trading equities, given the risk limits mandated by FNY? I mean to make that much, he's taking huge risk and he's trading on what... "Intuition"...?
And Jennifer Fan... She's a relative value trader, market timing for her needs to impeccable. From what I heard on the street, she is running a 200mm book (ALL BY HERSELF)... And she is trading commodities so on a given day, she can be down by a significant amount, in the case she is wrong. When she was a trader at the bank, no one taught her to prop trader. Maybe it's a dual combination between intuition and her stats degree from NYU and she was able to make a strategy? I mean no one taught her anything.. Can you agree she developed a strategy on her own. What skills you think was transferrable when she moved to the fund?
we don't know exactly how a persons market intuition develops...but for most, its a combination of exposure (seeing lots of different things) and mentoring (more senior people who have figured things out teach their juniors). After some number of years, the combination of these 2 things, combined with your own insight that you develop over time, coalesce into your own personal trading strategy / style.
its different for everybody, but these elements are the foundation. When you develop a way to look at the market that makes sense to you, and the market confirms your view/strategy....it just makes sense. If you don't have this gut feeling that is confirmed by the market, then you just aren't there yet.
Once you do have this strategy confirmation, then you can scale it up and trade it in much larger size to the point where you dominate a market...and that can be into the billions.
First: Jen Fan worked at Arrowhawk and Arrowhawk failed to raise enough money and shut down. She then started her own fund (cant be bothered to look up the name), her own fund shut down due to it being down 5-10% in her two years.
That aside, who says that if your at a bank you cant learn to prop trade. Banks had alot more flexibility prior to the GFC. MS in NY has a big commodities team and they do prop trade to this day. They also do lots of physicals, and if you understand how the product flows and regional S&D balances you can translate that into financial trades.
"no one taught her anything"...........did she tell you this?
You are correct that your timing has to be impeccable if you are just taking out flat price risk. However many who trade commodities - trade spreads. For example if you know that that production in the Permian is going to pick up and associated gas will cause a regional surplus, as there might not be enough takeaway capacity to move the gas to the gulf coast. Your trade might be short Waha and Long other regional benchmark (credit RBN). Benefits of this kind of trade: Less risk and you dont care what the price of gas is but rather what the spread is.
I guess what I'm asking is a question that is impossible to answer unless you're him/her.
Strategies At Various Hedge Funds (Originally Posted: 02/08/2007)
I'm doing some research and I need to find out the names of PM's at a couple hedge funds, as well as the funds strategies(i.e. risk arb, long equity, etc.). Im interested in funds such as citadel, deerfield, footbridge, gabelli, goldentree, gruss, highbridge, and soros to name a few. I realize this is very difficult information to get, and any suggestions on where I could get it would be greatly appreciated.
maybe someone will fwd this thread to them and they'll be kind enough to answer...has happened before.
names of pms at different funds? you're insane. good luck.
Why are you interested in this information? Job seeking, mere curiosity, or information for an academic paper?
is the pm at Citadel
The founders of the different funds: Ken Griffin at Citadel David Shaw at D.E Shaw James Simmons at RenTec etc Henry Swieca and Glen Dubin at Highbridge
Note, however, that these aren't necessarily the pms.
Is there any "business strategy" in hedge fund work? (Originally Posted: 10/12/2010)
Hi,
I'm just curious if being a hedge fund analyst will involve looking at how businesses run, analyzing various corporate strategies/management techniques, etc.? I really enjoy learning about how businesses work (i.e. what strategies, management techniques, etc. they use in order to become more profitable), and I was wondering if any of that is included at all in hedge fund analysis or if I'd probably need to look at a different career for something like that? It doesn't have to be a primary focus, but is there at least a decent amount of it (like 20-25% of the total work), or is it all just markets and how they work/trends in the asset market? Generally, what type of person would enjoy hedge fund work? Someone who is purely into trading and studying the stock market and how it moves, someone interested in corporate valuations, someone interested in strategy, or what?
Thanks
What exactly are you asking?
Are you asking how traders develop an edge? It's different for everyone. You can read about many different ways in the market wizard books (in fact, the latest one has an interview with a FNY trader)
depends on the fund's strategy, bro.
Fair enough, which ones are more business strategy oriented?
Fundamental Shops are almost entirely driven by some of that analysis. At least mine is. The best person for HF work of that sort is someone who can absorb lots of information, network well, think about financial topics, and jump from topic to topic. A synthesizer or industry expert, if you will. For the short term, you have to tell me if a decrease in a given macro number will affect Intel's share price. For the long term, you have to tell me how Intel can grow, what its risks are (what the risks to the stock are also), how fast can it grow and a whole slew of more minutae oriented things. Then you have to have the balls to come up with a recommendation.
The ones more driven by events and M&A are very focused on business style and strategy, especially where management is concerned.
The position that you are describing sounds exactly like a long/short equity analyst. I wrote a "day in the life" blog post on this position if you are interested:
http://www.wallstreetoasis.com/blog/a-day-in-my-life-as-a-hedge-fund-eq…
You are asking an unanswerable question really, if you want to know how a person developed a strategy then you need to ask that person or someone very close to them.
But I would say this: -20k per day is not a huge PNL sigma for 1 trader. 5m per year PNL on a 20mm book is 25% without leverage (and im assuming there is leverage on top of that so the unlevered return is lower). Great return, but certainly not even close to unbelievable, especially on such a small base (obviously gets harder to make large returns as capital increases).
-Running a 200m book by yourself isnt crazy either, Ive seen much much bigger than that.
Best hedge fund strategies? (Originally Posted: 12/27/2012)
What strategies have historically performed the best? Are there any that are particularly difficult or easy to get investors for? What strategies are most commonly used among hedge funds?
This
That statement is retarded. Just because someone gets admitted into a good school does not mean that they know everything about everything.
Strategies/styles fall in and out of favor. As funds put up big returns, others try to emulate them and outsized returns are harder to come by, until they are no longer hot areas and returns grow again.
Read "More Money Than God" which details this history of HFs and how they came in and out of favor.
No, there are no strategies that are easier or harder to raise AUM. I could guess that the biggest % of capital goes to L/S equities, but it is a very crowded space.
The most popular strategy among HFs are aimed at buying low and selling high. Some try to sell high and buy low.
Good one. +1
LOL we got a prestige whore in the works right here...
Like others have said, the numbers aren't anything to write home about, really... I don't know anything about the people in question, either.
In terms of how managers develop their skills, most commonly it happens the same way as in all the other professions. Namely, through an apprenticeship. Alternatively, it can also happen by trial and error, but that's much less likely to to produce a positive outcome.
Hedge fund strategies - Investment decisions? (Originally Posted: 02/08/2013)
Does anybody use hedge funds' picks for their own investment decisions?
Usually by the time you find out about what they're in, it's too late.
Not always...if you focus on certain segments the delay actually helps..check our a site called "insider monkey" -- their strategies discuss this. They have a section on marketwatch that discusses where to focus on..pretty interesting.
Good to check though. At the very least, you can try working backwards and looking at what kind of opportunities they identify. And sometimes you can find a gem that you wouldn't have noticed otherwise that hasn't popped yet.
you also don't see their hedges. This is the equivalent of looking Gary Kasparov's moves on a chess board, copying them and losing, and wondering why you lost. DONT BUY WHAT YOU DONT UNDERSTAND
Very good point. No short positions are disclosed either (at least in the USA...). According to a friend in the industry, sometimes a fund will buy shares of a company while shorting it just to "reserve" the right to short it while making up its mind.
True...but some (not all) can still pick stocks well. Even though you can't see their whole portfolio.
Jim Chanos recently talked about why he thought it was stupid. My thoughts:
I've been a prop trader for 11 years. Edge can be gained from implicit learning watching markets every day for years and years. I'm not aware of any books that can explicitly explain how to trade successfully. Good traders can synthesize information, compare it to past experience, and then act. Perhaps more importantly, during completely new scenarios where there is no road map, they can deduce what is likely to happen. Peter To kind of touches on it starting at minute 54 in this podcast: https://chatwithtraders.com/ep-098-peter-to/
How to prove scalability of HF strategy (Originally Posted: 10/03/2014)
Ok, so I have this strategy using S&P and VIX related ETFs. I need to prove to my investors that this strategy is scalable given how liquid S&P/VIX products are. Is there like an objective measure/data that I can use in explaining this?
For example, I want to say something like 'since SPY can handle notional amount of about $X without affecting a tick in the market, this strategy can be scaled up to $Xm AUM without a reduction in profitability.'
I've been searching for two hours on web, but most scalability/liquidity articles are just so qualitative.
What's the average time frame for your trades?
It's intraday
Why wouldn't you trade the futures indices in lieu of the SPY? Apart from the obvious benefits, section 1256 contracts have superior tax treatment.
HF Purchase/Sale Strategy (Originally Posted: 02/12/2015)
I've heard that some hedge funds try to stretch their purchase and sale activity out over several trading days, as opposed to buying or selling stocks in big lump sums. What is the reasoning behind this? Is it to avoid creating any big/noticeable price fluctuations?
That is correct. Most funds have a max amount of the daily liquidity under which they want to remain. that amount differs by fund and others can weigh in but i'd say rule of thumb is 10-15%. you are correct in saying the reason is to avoid moving the price. The other issue to consider (and potentially the bigger concern) is on the back end. If an investment goes against you, you don't want to dump a huge block of shares and drive down the price. Better to sell into available volume.
Yes, this is correct. We look at the total # of shares trading per day and total $ value of shares trading per day which is what @"White Collar" referred to as liquidity. For a stock like Apple which trades $6B in shares per day, we would be less concerned about executing a buy/sell order because we know that the trade will executed close to market value. For a small-cap name that only trade $3M a day, we would have to trickle in over several days / weeks as to not cause a spike in price (raising our own cost basis).
Yes, this is correct. We look at the total # of shares trading per day and total $ value of shares trading per day which is what @"White Collar" referred to as liquidity. For a stock like Apple which trades $6B in shares per day, we would be less concerned about executing a buy/sell order because we know that the trade will executed close to market value. For a small-cap name that only trade $3M a day, we would have to trickle in over several days / weeks as to not cause a spike in price (raising our own cost basis).
Quant HF - which strategies to focus on (Originally Posted: 01/23/2016)
I'm interested in hearing opinion's on which strategy (equities / global macro, etc) would offer the most transferrable skillset to other shops should I choose to explore other opportunities down the road. I know this is highly dependent on the fund itself, but I guess just broad level insights would be much appreciated. Also, which particular asset based strategies do you guys think will be the most interesting in the coming year?
Thanks
There are much more experienced members who can advise you better, but I would say global macro (assuming you don't have a personal preference).
IlliniProgrammer Martinghoul Macro Arbitrage
If I am permitted a bit of cynicism, finance ain't exactly rocket science/brain surgery. It's all much of a muchness, IMHO.
One thing I would say is that it's much more common for people doing credit/equities/etc to get involved in macro, but not the other way round. This may not necessarily be because they have the requisite skills (although they may think they do), but that's my observation.
What little I know about global macro is enough to tell me I am too ignorant to make comments on it.
I will say that there is a decent amount of time series analysis and optimization in equities and that is transferable within finance and outside.
Strategies / Definitions (Originally Posted: 04/21/2006)
The Hedge Fund industry is confusuing enough...here are some definitions of different types of strategies they employ.
Convertible Arbitrage: An investment strategy that is long convertible securities (usually preferred shares or bonds) that are exchangeable for a set number of another form (usually common shares) at a prestated price, and short the underlying equities.
Distressed Securities: Fund invests in securities (equity and/or debt) of a company either already in bankruptcy or facing it. These securities are purchased by the investor inexpensively. It is hoped that as the company emerges from bankruptcy the securities will appreciate.
Emerging Markets: Fund invests in securities of companies in developing, or, emerging countries. The strategy consists of purchasing sovereign or corporate debt and/or equity in such countries.
Growth Fund: Fund invests in growth stocks. This strategy seeks capital appreciation as it's goal. Many of these portfolios are hedged by short selling and options.
Macro or Global: This strategy invests in shifts in global economies. Derivatives are often used to speculate on interest rate moves and currency moves. These hedge funds exploit opportunistic investment possibilities wherever they may be found.
Market Neutral: Typically a long/short strategy -- where equal amounts of capital are invested long and short the market. It attempts to "neutralize" market risk by purchasing under valued securities and shorting the over valued ones.
Market Timing: Anticipates the timing of when to be in and out of markets. The allocation of assets among investments primarily switching between stocks, bonds and cash depending on market and/or economic outlook.
Opportunistic: The manager switches between strategies as the manager deems necessary. It is not unusual for a manager to employ several strategies simultaneously.
Sector Funds: Manager invests in different sectors of the economy such as technology, finance, etc. A sector fund manager will invest long and short securities. They will also use options.
Short Selling: The manager finds companies that have over valued securities and "shorts" or sells the stocks of those companies. In anticipation of the stocks of these companies going down, the manager borrows the stocks to sell them hoping to buy them back later at a lower price. In this way the manager replaces the shares that he borrowed in order to sell. These portfolios often see rapid portfolio turnover in addition to the use of leverage.
Special Situations: Manager takes a position in an undervalued security that is anticipated to rise in value because of an expected favorable turn of events. Such strategies are known as "event driven." Some special situations include an announcement of a merger, reorganization, or a takeover to name but a few. There are hedge fund managers that specialize in these different special situations.
Merger/Risk Arbitrage, mentioned above is one such "event driven" strategy. In this case, the manager invests in announced corporate takeovers/mergers.
Does anyone know of a good source for hedge fund returns?
for individual funds? like what quartile does each fund fall in?
if you're looking for general index returns, hedgeindex.com is a decent place (run by Credit Suisse) for free information. HFR is another for more in depth, but you'll need to pay.
Best way to learn about a specific hedge fund you are hoping to interviewwith is to make nice to the credit counterparty risk analyst who covers the fund...
Barron's
For indices HFR is good. Bloomberg, HFND is pretty good too.
As an FYI, ranking hedge funds with different strategies based on absolute return is not an accurate way to guage funds. Even within the same strategy, the amount of leverage used by a given fund will have a dramatic effect on returns (i.e., risk-adjusted returns). Additionally, there are many funds that are solely interested in doing true "hedging" (e.g., portfolio insurance) and target low, stable or counter-market rates of return...
Thanks for posting those up. Gives some clarity, and I don't have to look like a fool and ask one of the Junior analysts here :)
yea some great information here - thanks!
Thanks for all the good info
Much appreciated!
How do hedge funds make money? (Originally Posted: 03/13/2010)
How do hedge funds and mutual funds make money for themselves?
For example, your average mutual fund will charge around a 1% expense ratio but that seems so small that it isn't even enough to pay off their fund manager, analysts, administrative/support staffs.
Then let's look at hedge funds, which usually charge a 2% fee. So if we're to take a 1 billion hedge fund, the fees only amount to 20 million. How do they even pay off all of their staff, overhead, etc with that money?
Am I missing something here, how do funds make a profit?
Performance Fees from the profit they make. Usually around 20% but some of the biggest funds like SAC take in up to 50%
Dude mutual funds may only take 1%, but in the case of large funds with 50bn in assets that 1% is a very sizeable sum (500m in that case)! Its a business with significant economies of scale and thats why mutual funds are focused mostly on ramping up assets while maintaining OK performance.
Hedge funds take 2% of AUM and 20% of returns. Considering a relatively large 2bn fund might have only 80 employees or so its not hard to see how this fund could make some serious cash if they have an "OK" +15% year (40 mil fees and 60m incentives means 100m spread over 80 employees. taking out operating costs probably 1m/person to disburse).
80 employees!? That is a lot of people for $2B AUM.
^ Thanks, perfect answer I was looking for. I could see why some hedge funds shuttered their doors during the recession. Had negative returns and could not sustain with just their AUM fees.
Exactly....especially when investors pull out in a recession and your AUM gets hit not only by losses but by redemptions. AND you will typically have a "watermark" that you need to exceed (typically you need to earn back what you lost) before you can earn more incentive fees, which can cause the few personnel you don't have to fire to flee anyway. One bad year can definitely kill a good HF.
Dont forget mutual funds also charge fees -front end, back etc... depending on share class There only profit isn't on the aum
^ SAC has around 800 employees, with 20 alone in compliance. Their AUM is about 15 billion.
Needless to say, Cohen makes enough to pay his employees and his ex-wife's alimony.
IIRC, SAC charges 3 and 50.
I don't want to disclose too much but
20B fund 30-50% return last year 100 employees.
You do the math.
What 20B fund returned 30-50% last year? That is ridiculously high. I thought Tepper at Appaloosa did the best last year, but his fund is much smaller than that.
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