The Lonely Trader

Currency update, August 2014

In Journal on September 1, 2014 at 22:07

Still wrong about these markets. Realized gain for August was just over 2%. The projection was just over 1%. Some losing positions were effectively offset this month, but not as many as I had hoped. (Only about -1% of NAV was offset.) Volatility on the equity curve illustrates the balancing action I was attempting — it was up and down for a few days, but at no time was I uncomfortable. The model remains under-deployed, with less than 10% of capital on margin and only 14 trades in the book.

Currencies August 2014

The estimate for September is 0.85% and will likely remain low for remainder of the year, as the plan is to be more aggressive in offsetting losing positions (and to protect gains already realized).

Currencies Monthly August 2014

The annual target of 18%-28% is what is important. Turbulence is anticipated, but there is enough time (and opportunity) to offset losing positions and still make the annual target. The other priority, of course, is to limit draw-down on capital. While the month-to-month volatility bounds are +2%/-2%, actual NAV was -3% to -5% over the past three months. Fortunately, YTD max draw down is -5.7%.

While there are a few aspects of this model that continue to frustrate, the overall management strategy is working.

Currency update, July 2014

In Journal, monthly report on August 1, 2014 at 17:40

I’ve been saying for some time that returns would fall off a bit, and each time I’ve been wrong. Here I am again, saying the same for August — Returns will probably fall short of my minimum target of 1.5%. On the brighter side, July came in above expectations at 2.01%.

Projections for August are 1.02%. There comes a time when, after waiting for positions to produce something, letting go is the best option. Over the next couple of months, I will be letting go of some disappointing positions. The result? I expect below-target performance. This is fine by me, because the model has been doing very well. Better to shed the dead weight and make room for better opportunities.

Currencies Monthly July 2014

Currencies July 2014

I’ll draft an entry this weekend about some of the events this past week and explain what the plan is going forward. No more trade lists, unfortunately. I have to protect my model. :)

Gazing across the fund manager’s threshold

In Journal on July 28, 2014 at 22:28

For a few years now, I’ve been trading FX with an unorthodox quantitative model that has produced good results. The time has come to make it work for others. In the past, I vowed never to trade other people’s money. In the past, I’ve said some very stupid things. It’s time to move forward.

So what will it take?

Courage. Leaving my old life behind (and not “playing it safe”) is a little scary. Managing a business that has complicated and exacting compliance rules, and accepting the risks inherent in taking on clients is scarier. Courage is comparatively easy when I have the odds on my side.

Results. There are, surprisingly, only a few important measures of what makes a good model to a prospective investor. The major components of our decision about whether to invest or not are confined to just a few simple questions. What is our expected return each year? What is our risk? Are we gonna get ripped off? This part is easy, too.

Fairness. I realize the industry standard is a 2% management fee and a 20% performance fee. Some of the bigger players charge more. Some less. Would I, as a client, be happy to pay someone a 2% management fee up front and a 20% performance fee if I made the minimum annual target of 18% on my money? As an investor, what would I actually see in my account at the end of the year?

Clients. Obviously, I can’t achieve my goals without them. Results and fairness are great, but that doesn’t mean I can just sit back and watch the clients roll in. Finding willing investors for a currency fund is already difficult, thanks in large part to all the scumbags out there who lie about their results and steal from others. Outsourcing much of the relational sales effort will make things a little easier, but that must be managed as well. Imagine paying someone to bring in clients, only to have those clients be on a government watch list. Yikes! The other potential problem is acquiring clients who are not a good fit. Having people call me at odd hours to complain about a 1% move against them is not my idea of fun. Can’t they see that I have work to do? :)

As a former client, I’ve been burned pretty badly. One trader was an outright fraud. Fortunately, I dissolved the Power of Attorney before he could take a single trade. The other, a popular Twitter and StockTwits personality, was completely negligent in following his own risk management rules. While I was away in Afghanistan, he lost 70% of my account to margin calls in just a few days. With no explanation. I say this because I understand that people have concerns.  I was stupid and learned the hard way.

I spoke to several people affiliated with the industry about how to approach this. Two stood out. An acquaintance of mine who is an experienced fund manager said I had to hit just three wickets.

1. A track record of at least 8%-12% per year for the last three years, accompanied by a maximum continuous drawdown of no more than 10%.

2. Invest $100K minimum of own capital, to prove that I can keep my head when the risk is on and the inevitable drawdowns occur. I should trade this sum for at least one year and hit my targets. If I can scrape up $500K from friends and family, all the better.

3. These returns must be audited by an independent agency, such as Futures Truth.

An introducing broker and placement agent for people like me said essentially the same thing. After we talked about compensation, he added that underselling myself would send the wrong message. It might also be a disincentive to placement agents, who typically take 20% of the fund manager’s performance fee. If an agent is earning 20% on peanuts, s/he won’t be around for long. Of course, this depends on the size of the placement.

As an example of my dilemma –

a. Initial investment: $100K
b. Management fee at 2%: $2K
c. Initial trading balance (a-b): $98,000
d. Annual return at 18%: $17.6K
e. Performance fee at 20%: $3.5K
f. Net return (d-e): $14.1K
g. Net return after taxes (@ 33%): $9.5K
g. Percentages -
On initial balance: 14.4%
On initial investment: 14.1%
After taxes: 9.5%

Whether $100K or $10M, I could go either way as a potential investor. As a manager, why would it be a good deal for my clients? Getting compensation right the first time around is critical and I’ll need to carefully structure something that is mutually rewarding.

(Not very scientific) food for thought.


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