The Lonely Trader

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. 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.

Currency trading update

In Journal on July 1, 2014 at 21:55

A simple arithmetical error has me pretty embarrassed today. I have under-reported annual (and monthly) gains. The error was dividing the difference between the current balance and the previous balance by the current balance. I should have divided the difference by the previous balance. So at least I have that to smile about, however sheepishly.

201406 Currencies

Gains for this month were 3.34%. For the year, a solid 14.34% realized, which annualized is on track for 30%. Position interest came in at just under 9% of this month’s gains. Very healthy given that this month the carry was not a conscious strategy. I have resolved to watch for more trading opportunities and as a consequence I’m in more losing positions, but trade rotation has kept realized gains apace. Still carrying more than -2%. I’ll just have to get used to this “new normal” until I can work my way out of a few poorly trades. Accounting for NAV (at a little more than -3% as I write this), the Knotty has earned a smidge over 11% for the year, if marked to June 30th. Not bad.

201406 Trades

July will prove challenging, with several deadbeat positions still to turn around, but with a healthy yield to mitigate somewhat. I expect a bit of a resurgence in the desire for the positive carry, which I’m badly positioned for. And of course, I expect this to happen only when prices are more favorable for fresh longs, which means my positions will have gone from bad to worse. I should be averaging about -5% in daily NAV if this occurs. If this doesn’t play out, I suppose I’ll have to stick to last month’s plan and add more positions with neutral to negative roll, if the right setups present.

I’m not making any sense to myself, so I’m sure I’m not making sense to anyone else. Good night all.

Currency model description posted

In Trading Methods on June 29, 2014 at 16:00

A brief description of the currency model has been posted to the Currencies page.

201405 Currencies



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