
Hedge-Fund Growth and Tax Arbitrage - chollida1
https://www.bloomberg.com/view/articles/2017-06-09/hedge-fund-growth-and-tax-arbitrage
======
dsacco
Matt Levine's first point here is very interesting as a lens for understanding
why so many large hedge funds seem to have difficulty beating the market,
while the ones that do tend to be either smaller operations or more
independent groups within the giants.

If you look at the best firms in the world, like RenTec or TGS, you see a
trend where they typically stop taking in outside capital and effectively
convert to family offices (at least for the most profitable strategies).
Levine's point here is particularly applicable to RenTec; it has famously
incredible returns via Medallion, but not so much the other funds.
Unsurprisingly, the Medallion fund is entirely employee and owner capital.

As extremely profitable strategies scale up to their capacity constraints,
fund managers naturally decide to pool greater amounts of their own capital
into the firm. Therefore, "skin in the game" is not only effective as an
intuitive heuristic for skill ("this manager believes in the fund enough to
put most of their personal net worth into it"), but it's also _practically_
effective for showing how likely the firm is to perform based on how much
you're able to participate.

As the percentage of "skin in the game" increases, the likelihood of outside
investors being able to participate decreases, because the fund managers know
they no longer need to share risk, and don't want to waste allocations on the
way to capacity constraints. If a firm is soliciting capital, it's highly
suspect, and managers who go on to become the next Jim Simons or Seth Klarman
will mostly be "on the market" for relatively short periods of time.

------
SirLJ
Based on my personal experience trading and back testing quantitative systems,
the more money you have the harder is to find alpha in the markets, for
example I have one system good for up to 1 - 2M which generates me double
digits yearly returns, but above that my next system for up to 10M will do
only a single, up to lover double digit return (trading the stock market only,
because I don't have the data to test Forex or Futures). It's all about the
volume and slippage... Just can't imagine how to trade with billions without
ending up owning some company by mistake :-)

~~~
fsagadhadffsh
What books do you recommend to get started with automated trading? :)

------
theprop
Interesting! Probably the most consistent top performer of the large hedge
funds is the quant fund Renaissance and it's 100% I think employee/owner-
funded at this point.

------
etjossem
I hope fans will forgive me for saying this, but Matt Levine's newsletter is
kind of incoherent and not relevant to the HN audience. It never has much of a
focus, and it's only rarely about tech. If you like this kind of newsletter,
just subscribe to it:
[http://link.mail.bloombergbusiness.com/join/4wm/moneystuff-s...](http://link.mail.bloombergbusiness.com/join/4wm/moneystuff-
signup).

Kindly avoid posting it to HN every day. Post the articles Levine links to
instead, if you must.

~~~
vincefutr23
What do you mean by incoherent?

~~~
etjossem
I expect to read technology articles here, not the unfocused thoughts of a
finance columnist on 5+ different topics.

~~~
taspeotis
[https://news.ycombinator.com/newsguidelines.html](https://news.ycombinator.com/newsguidelines.html)

> On-Topic: Anything that good hackers would find interesting. That includes
> more than hacking and startups. If you had to reduce it to a sentence, the
> answer might be: anything that gratifies one's intellectual curiosity.

~~~
imron
I think it's the unfocused thoughts on a range of different topics that's the
problem.

I don't mind reading about non tech things. Rambling musings on the other hand
don't really do it for me.

