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

  • #21
  • Jan 22, 2011 8:24am Jan 22, 2011 8:24am
Quoting ForexQuant
It is risk adjusted returns that matter. Returns itself has no meaning for comparison, it is only good for advertisement.
Quoting Mr J
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.
It is. ForexQuant's post should be the end of this thread. It's consistency of risk-adjusted returns that draws serious investors' money to a fund. If you can acheive that, nobody's gonna care if it's due to skills or luck.
  • #22
  • Jan 22, 2011 9:07am Jan 22, 2011 9:07am
You can't compare individual trader with small accounts to hedge funds with huge accounts. You can return 1000% on a 10k account because the market is huge compared to your account. It's a zero sum game so you have a lot of big and small accounts that will lose to give you 1000% profit. When you're talking about a hedge fund with 100M account where are you going to find so many losers to make you grow your 100M by 1000%?
  • #23
  • Jan 22, 2011 9:08am Jan 22, 2011 9:08am
Quoting CindyXXXX
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,
Sorry to be grating but could you mention some numbers.

For instance lets say I had a $50 million account. Could I buy 500 standard lots without worrying about things like liquidity and getting my money in and out?
  • #24
  • Jan 22, 2011 9:41am Jan 22, 2011 9:41am
Quoting kuzco
Sorry to be grating but could you mention some numbers.

For instance lets say I had a $50 million account. Could I buy 500 standard lots without worrying about things like liquidity and getting my money in and out?

you can only buy what someone will sell to you at any given price - hows that?

It depends what price you want, what market you're trading - its such an open ended question that no I cant give you any numbers... Too many variables
Time hides Nothing
  • #25
  • Jan 22, 2011 10:11am Jan 22, 2011 10:11am
Quoting kuzco
Sorry to be grating but could you mention some numbers.

For instance lets say I had a $50 million account. Could I buy 500 standard lots without worrying about things like liquidity and getting my money in and out?
50 mil will move EUR/USD by around 5 pips. Source: Oanda.
  • #26
  • Jan 22, 2011 11:05am Jan 22, 2011 11:05am
this will not even be a hiccup in the eur. a few here trade 50 lots and i do not talk about fxcm lots. if big positions need to be placed the order is split and not bought at once, that also why prices comes back to specific levels. sell obviously some in the euro session and buy it back bigger at the asian dealers. its all about hiding orderflow as far as possible.

Quoting kuzco
Sorry to be grating but could you mention some numbers.

For instance lets say I had a $50 million account. Could I buy 500 standard lots without worrying about things like liquidity and getting my money in and out?
  • #27
  • Jan 22, 2011 3:48pm Jan 22, 2011 3:48pm
Quoting kuzco
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?
Well, very simple...Check the average value or volume traded on a given day....If the volume you want to trade is 25% to 35% of that average, you have to worry about getting in or out...Applicable to any market or instrument...


Regards,

Nader
  • #28
  • Edited 5:27pm Jan 22, 2011 5:11pm | Edited 5:27pm
Quoting kuzco
I do realise that even small % for hedge funds translate into tens/hundreds of millions of dollars

20% returns in still much higher than term deposits, govt bonds, muni's and other sources of low risk investments. Economic theory states that most investors are risk adverse. But they are more risk adverse than someone with a $10,000 deposit.

Consequently, they don't want managers scalping the e-mini S&P naked for a few ticks based on S/R. They want managers to engage in low beta arb strategies. Which offers lower relative risk, more consistent results and a higher sharpe ratio.

Not that they could sclap markets in such a way anyway.

An individual investor can place his 5 contract limit order at a pivot point on the emini-S&P for a 3 tick scalp.

Can a a hedge fund place a 50,000 contract limit at the same price?

Small private investors don't have such liquidity disadvantages. But liquidity is only half the reason they don't make 100% returns.
  • #29
  • Jan 22, 2011 7:42pm Jan 22, 2011 7:42pm
Quoting Ipso
It is. ForexQuant's post should be the end of this thread. It's consistency of risk-adjusted returns that draws serious investors' money to a fund. If you can acheive that, nobody's gonna care if it's due to skills or luck.
It should have been clear that I was talking specifically about the comparison between participants of completely different sizes. For the purpose of comparing the returns of small and large traders, emphasising the skill that is required to achieve these returns is quite important.

The topic of this thread is the comparison of returns between small and large traders, not between hedge funds for the purpose of attracting investors.
  • #30
  • Jan 25, 2011 2:14am Jan 25, 2011 2:14am
What is the average profit for past 10 years from Hedge funds?
  • #31
  • Jan 25, 2011 2:26am Jan 25, 2011 2:26am
Quoting honestb
What is the average profit for past 10 years from Hedge funds?
Are you having trouble finding Google? Here: www.google.com
If you don't risk, you don't ever have to lose.
  • #32
  • Jan 25, 2011 3:03am Jan 25, 2011 3:03am
Quoting honestb
What is the average profit for past 10 years from Hedge funds?
Since 1980, the average hedge fund annual return was 12.6 per cent. But, weighted for investment flows, the average investor received only 6 per cent, they found, well below equity returns and not much better than bonds.

http://www.ft.com/cms/s/0/981a7710-b...#axzz1C2mFB2yO
  • #33
  • Feb 19, 2011 4:47am Feb 19, 2011 4:47am
Quoting kuzco
Sorry to be grating but could you mention some numbers.

For instance lets say I had a $50 million account. Could I buy 500 standard lots without worrying about things like liquidity and getting my money in and out?
This thread hasnt had a post in a few weeks but let me just put it plainly to the above quote. If you were trading with capital of 50mil then you would be quite happy with the paltry 20%-30% returned but those hedge funds. That would net you around $10-$15 million a year.

Getting out of large volume trades without have too much effect on price is a skill. You just cannot exit billions of dollars worth of stock at once, you need others to buy it and selling that much create surplus which lowers demand and the end result it lowers the price so by exitting at once you effectively shoot yourself in the foot. You on the other hand can close that 2-3 standard lot without the problem of finding someone to take the other side, your order is just a drip in the ocean. The hedgefunds/bank etc are that ocean.

Considering the above 300% is nice but your not in retirement over it so it really isnt that special. If you could somehow manage 300% over the next 10 years well then that would be special, by that stage you will probably have come back to this thread and gone 'geez, 20% of a billion is pretty damn good'.

RT
  • #34
  • Feb 19, 2011 5:18am Feb 19, 2011 5:18am
Razor is spot on here. It has been determined now that the flash crash that occurred on May 6th last year was the result of some guy putting in a large sell order without breaking it up into smaller pieces. This is as good an example as you're going to get when it comes to 'how not to liquidate your fairly large position'.
If you don't risk, you don't ever have to lose.
  • #35
  • Last Post: Feb 19, 2011 10:26am Feb 19, 2011 10:26am
Quoting kuzco
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?
Because hedge funds use less leverage perhaps? How many mini lots do you typical trade, how much currency are you exposed to?
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