Why do hedge funds have such poor returns compared to successful retail traders?

Hi guys just wanted to ask this question because its been bugging me for a while.

Last year I made a 300% annual return on my £10k account earning just over £30k. Yet when I look at hedge funds returns I see such poor returns. I think the best hedge fund last year only returned 20%.

I do realise that even small % for hedge funds translate into tens/hundreds of millions of dollars but even still purely from a % return it is not impressive.

what are the main reasons for this?

It's harder to move a mountain than it is to move a wheel barrow full of dirt.

I guess cause they rather go for less volatility and more consistency. Just imagine a hedge fund having one year 300%, next year -100%, third year 250% & fourth year maybe -200%.
Not a lot of investors would be able to stomach such kind of equity curves.
Now take off a 0 on each year, then you have 30%, -10%, 25% - 20%. Investors can much better stomach that kind of account volatility.

And anyways, the hedge fund managers earn 25% of profits + 2% management fee if I am not mistaken.
Depending on how much they manage, that translates into a couple of million to hundred million dollars each year they make for their own pockets.
Not too bad I would say, for "just" having a 20% market return.

But just my own thoughts about that.

I suspect your volatility will be greater and as another poster has already said, in order for you to make 300% return you'll have taken on a great deal of risk. When it comes off, its great but when it doesn't you'll lose big too.

Best of luck for the future however and long may your 300%pa continue

because they hedge?

nuff said
/thread

Thanks for the reply's guys.

All makes sense now.

Because when you trade other people's money they just about all lie to you. When you ask them what is their loss limit, they might say it's 25%. Yet when you hit a 15% drawdown or less, they'll bail on you like a rat fleeing a sinking ship. If you want to keep clients, you can't scare them with drawdowns. Therefore, you have to risk very little amounts which translates to small returns.

Plus, as someone else mentioned, trading 10k is nothing. Try moving hundreds of millions in and out markets. It's not an easy thing to do.

Because you are a retailer and you focus on percentages. Plenty of HF's pay themselves over 500Mln a year, quite a few took home over 1Bn for a year's worth of work, (Tepper takes home 4 Bn a year, and his customers are happy with that), your 10k/300% is irrelevant and just for brags among retailers.

I only mentioned the 300% as an example of a good year for me, not to brag. Believe me Ive had my bad years as well.

And you just hit the nail on the head. Annual return is irrelevant, risk is. That's why you don't see a HF returning 300%, but you will see plenty returning 30% year on year for decades, I know where I would rather put my money (and do).

A retailer will never make it in this business, even the ones returning an occasional 300% unless they start focusing on consistency and risk.

Well, sorry to say this, no offense, but Hedge Funds average those mere returns compared to yours' simply because they know what they are doing...

Check your risk of ruin and theirs' and then compare your returns to theirs'...


Regards,

Nader

Above posts have already highlighted some of the reasons but one has been left unmentioned: the 2-20 industry standard. Hedge funds typically charge 2% of funds under management +20% of profits. With a large enough mountain of cash under management it doesn't really matter how much you make for your clients, because you are swimming in cash whatever the returns.

Large hedge funds and smaller traders aren't comparable, pratically playing different games. Same ecosystem, but very different animals.

1. Size. A small trader can get in and out far quicker and at better prices than a large fund. They move the market little or not at all, and have barely any time exposure. A small trader does not need to play tricks to catch liquidity. Many (I imagine virtually all of the public) think that it is an advantage to be large when it is in fact a liability.

2. Variance. Hedge funds generally make great use of other people's money, and investors tend to be pretty intolerant of negative fluctuations. They might give you $500,000, but they will only be prepared to lose a fraction of it (many not prepared to lose at all!). As a result, hedge funds must be more conservative. A small trader on the other hand is accountable to no-one but themselves, and can be aggressive as they wish to be.

As for risk-of-ruin, any good trader has such a large edge that the argument is insignificant. In fact, the smaller, skilled trader actually has a larger edge than the decent hedge funds, which means they can often risk substancially more of their capital while maintaining a comparable risk-of-ruin.

It is risk adjusted returns that matter. Returns itself has no meaning for comparison, it is only good for advertisement.

It's not all that matters - think of the skill required for a large trader to achieve a similar risk-adjusted return to that of a small skilled trader.

So just one question.

What is classed as a large account?

Let me rephrase that......

At what size account would a trader have to worry about moving his position in and out of markets?

depends on the market and the available liquidity - time of the day would play a role as well I guess

In any forex market - quite a lot. At 300% p.a with a 30K account I wouldn't worry for another few years yet. I'd be more worried about repeating that success,

My friend is a forex manager and his trading performance is average 42% per annum no compounded for past 13 years. Also income from his investment company is tax free. So the final profits received by his investors are high.

The profit is 15000% to 20000% compounded after 15 years if a investment company pays average profit of 40% to 45% per annum for 15 years, The trading performance of 10 years and more is important to determine whether a investment company is long term profitable company.

A trader can earn 100% or more profit for 4 or 5 years but he can lose all his profits in a bad year because when profits are high the loss can also be high.

2010 Hedge Fund Returns: Performance Numbers From Top Managers

Data from Hedge Fund Research indicates that as a whole, hedge funds returned 10.5% for 2010, lagging the S&P 500 return of 15.06%. Below you'll find specific hedge fund performance from top managers for last year. We'll continually update this post as more numbers roll in.

In general, the month of May was brutal for hedgies, but the majority managed to turn things around by the end of the year. And if you're interested in a year-over-year comparison, head to our posts on 2009 hedge fund returns as well as 2008 returns.

Hedge Fund Returns: 2010

Paulson & Co: +11%. That number pertains to John Paulson's Advantage Fund. The firm saw varied performance last year as its Advantage Plus Fund returned 17%, its Recovery Fund soared 24%, its Gold Fund returned 35%, and its merger arbitrage fund returned 27%.

Also worth highlighting is the fact that the gold share classes of Paulson's funds performed markedly better. The gold share class of the Advantage Fund was up 31% in 2010 (compared to +11% for the normal class). As always, we've showcased an in-depth look at Paulson's gold fund.
Bridgewater Associates: +38%. Ray Dalio's 'zen' approach to an investment firm paid off as they returned one of the higher totals across the hedge fund industry last year. The firm manages around $34 billion.
Renaissance Technologies (Medallion Fund): +30%. Jim Simons' legendary hedge fund continued its epic run of performance in 2010. What's astonishing is that those numbers are net of a 5% management fee and a 44% performance fee (gross performance of the fund would have been around 60%). Back in 2008, Medallion returned an astonishing 80% while markets crumbled.

RenTec's RIFF finished up 22.7% and its RIEF was up 16.5%. We've posted up the Medallion Fund's historical returns before for those interested.

Millennium Management: +13.3%. Israel Englander's firm now manages around $9.1 billion.

Greenlight Capital: +12.5%. We've of course covered David Einhorn's portfolio in-depth on the site. Last year seems to be the first that he's lagged the major market indexes as he took a cautionary stance given economic uncertainty.

SAC Capital: +15%. Steven Cohen's firm was amongst a bevy of other hedge funds that saw returns in the mid-teens.

Pershing Square Capital: +29.7% net. Bill Ackman's hedge fund had a stellar year as a bet on General Growth Properties' (GGP) bankruptcy turnaround paid off. Ackman discusses his portfolio here.

Tudor Investment Corp: +7.5%. Paul Tudor Jones' flagship BVI Global fund was positive for the year but still lagged the markets in general.

Glenview Capital: +15.3% net. Here is our coverage of Larry Robbins' portfolio activity.

Moore Capital: +3%. Louis Bacon's flagship Moore Global was up only single digits for 2010, but its macro managers fund returned 105%.
AQR Capital: +27.3%. Cliff Asness' firm saw solid returns last year in its macro strategy.

Third Point: +34%. Dan Loeb's Offshore hedge fund had an impressive year and we've detailed his portfolio throughout the year. He manages around $2 billion.

JANA Partners: +8.4%. Barry Rosenstein's activist and event-driven hedge fund has around $1.9 billion AUM.

Clarium Capital: -23%. Peter Thiel's hedge fund continues to struggle as its long-term predictions face near-term volatility. While Clarium was down single digits in 2008 (and thus beat the market that year), the fund has lost money for three straight years. At last tally, Clarium managed $681 million, way down from its peak of over $7 billion.

Citadel Investment Group: +10%. Ken Griffin's investment firm saw 10% returns in its main Kensington and Wellington funds.

Passport Capital: +5% gross. John Burbank's macro style of investing has been known for its volatile near-term swings but solid long-term performance. We previously posted Passport's market commentary.
Centaurus Energy: -3.8%. Famed energy trader John Arnold suffered his first yearly loss in 2010. Arnold makes large and concentrated bets and has been hampered by regulators imposing position limits.

Xerion Fund (Perella Weinberg Partners): +12.66% net. Dan Arbess' fund manages $2.3 billion and we posted Xerion's 2011 investment outlook.
BlueCrest Capital: +16%. This quant fund turned in better numbers than its multi-strategy fund, which was up 8% or so.

T2 Partners: +10.3% net. Whitney Tilson and Glenn Tongue's hedge fund had a great start to the year but then bled gains as their short positions rallied against them. Here are T2's long and short positions.

Och-Ziff: +8.44%. Performance is for their flagship Master Fund. Their Special Investments Fund was up 13.16% for 2010. The firm manages over $27 billion.

Perry Capital: +14.6%. We talked about one of Richard Perry's latest investments here.

Possibly the most intriguing note about hedge fund returns for 2010 is that a number of big name investors lagged market indices. This includes Ken Griffin (Citadel), Paul Tudor Jones (Tudor Corp), and one of Louis Bacon's funds (Moore Capital). Heading into 2011, we've already seen that hedge funds have reduced equity exposure so it will be interesting to see how they zig and zag through markets this year.

http://www.marketfolly.com/2011/01/2...rformance.html#