> the fundamental job of almost every market participant
Not true. You might make an argument that this is the effect of having them together in a market, but that's not their job:
- Market maker: hang around the market offering to trade with anyone (pref retail) at a spread. Doesn't care whether TSLA is gonna be able to make all those Model 3s.
- Pension fund: make sure they can pay the liabilities that are coming due. If that can be locked in, happy to pay a bit more than fair value to do so.
- Hedge fund: make absolute returns. Buy before it goes up, sell before it goes down. Whatever form of voodoo (or skill) fulfills this is fine. This doesn't have to mean finding the right price (could just mean you guess which way it's going), though of course often it is part of the objective.
- Broker: finds people on both sides of a trade. Doesn't care terribly much except to create excitement.
- Banks: lend money/securities and offer services to all of the above. Create research to make people trade. Securitise stuff so people can trade it. Often do a bit of everything.
Hope you dont mind me asking a slightly unrelated and possibly dumb question.
Im a programmer, but on the side have made on average 150% profit in share dealing over the passed 5 years, but more importantly, a much higher return in other assets to 2 orders of magnitude higher.
My question is - would experience / gains like this - if i had proof etc - get me an interview in a fund as some type of well paid (6 figure atleast) analyst?
Yes, go on LinkedIn, there's a bunch of recruiters hawking jobs at funds. Generally they want a Sharpe ratio above 2.5, $10M profits a year.
And you need to know what machinery you'll need too. Capital requirements, counterparty agreements, access to stock lending, cost requirements, IT requirements, everything.
Some of the newer shops say you can keep your own IP. Haven't checked whether it's true, but most people I know are sceptical.
Say I set up a fund holding a low cost s&p500 index ETF, but at the end of each year sold naked puts with a ~1/25 risk of ruin to earn ~4% return. Therefore my fund consistently makes 4% over the market index, except for 1/25 years when it explodes and loses everything. Because the volatility is low, my sharpe ratio is good (until it explodes), correct?
Assuming it can stay in business >10-15 years won't I be a billionaire hedge fund manager by then and then change to a low risk strategy that only makes 1-2% more than market index with very low risk of ruin and just let my investors lose interest and quit the fund over the next decade while I continue to earn fees from them?
Investors will ask you what you're up to, and if you're just doing that they won't invest. They also keep an eye on whether you're doing what you say.
Anything that's both simple and mechanical is gonna have problems attracting investment. The guys you're talking to are gonna have problems justifying giving you 2/20 for buying a fund and selling options.
Or should. I've met a lot of investors who didn't ask the right questions.
Regarding the Sharpe, if they know what they're doing they're not just using the textbook version either. There's a paper by Andrew Lo about it, well worth a read, not terribly complex math.
But it would be pretty easy to obfuscate the whole thing behind a few layers of "We've got 50 PhDs working here, we run black box algorithms" etc etc, the strategy could be artificially made a couple of orders of magnitude more complex while still producing the exact same outcome.
Do hedge fund investors keep an eye on whether you do what you say? How did Bernie Madoff go for so long if that's the case?
Of course the mechanism is simple and mechanical, but that isn't how you'd market it to investors.
The 50 phds thing is exactly what certain large firms are doing. The emperor's new hedge fund. I know people who've worked at major firms, and they've told me what they do. But you are going to have a hard time doing a startup with 50 phds.
Madoff was the cause of all the due diligence, though I'd say Europe was a bit different from the US at the time.
If [0] those returns are accurate, can be proven, and your strategy can be scaled up to multi-million dollar positions, you should take it to a hedge fund/prop shop/etc. and be able to make 7 or 8 figures. Your bonus should be dependent on performance; you may be able to negotiate a % of the profit. Those companies don't care about your background if at the end of the day you make them money.
Short of spending a million dollars right then and there, you can use historical market data. Or datasets provided by the person you're trying to prove it to. Keep in mind that after a certain volume, your model would start influencing the market itself.
Either way, it's insignificant and you're actually losing money. The stock of all the big companies went up tremendously in the past 5 years. Anybody who invested in large US equities made just as much if not more.
I think you're missing the gist of his statement and also overlooking the word "almost"?
That being said, most of your definitions are still dependent on competitively pricing securities. A market maker who can't calculate reasonable theos won't be a market maker for long.
I think it depends a whole lot on what exactly you are market making and how you're trying to profit. Of course many desks take views as well, but mixing in prop positions doesn't change the essence of it: the MM is trying to make money off being available for other participants.
You can of course also learn some things about where to market is going in the course of this business, and many desks are able to piggy back on some flow information for their advantage.
Hedge Fund: Convince customers to invest their money in the fund. Extract as much of it as possible through fees. Doesn't care much where the market goes, charge a fee either way, a bit more if it goes up.
Thanks for being so concise. Getting license to sell estates (life insurance), hope to make $$$, worm my way into FINRA to take series 7, then try operate under reg crowdfunding to raise $1 million capital for new biz. What you do now?
Not true. You might make an argument that this is the effect of having them together in a market, but that's not their job:
- Market maker: hang around the market offering to trade with anyone (pref retail) at a spread. Doesn't care whether TSLA is gonna be able to make all those Model 3s.
- Pension fund: make sure they can pay the liabilities that are coming due. If that can be locked in, happy to pay a bit more than fair value to do so.
- Hedge fund: make absolute returns. Buy before it goes up, sell before it goes down. Whatever form of voodoo (or skill) fulfills this is fine. This doesn't have to mean finding the right price (could just mean you guess which way it's going), though of course often it is part of the objective.
- Broker: finds people on both sides of a trade. Doesn't care terribly much except to create excitement.
- Banks: lend money/securities and offer services to all of the above. Create research to make people trade. Securitise stuff so people can trade it. Often do a bit of everything.
Source: used to run hedge funds.