Today I want to know who is the “biggest swinging dick in town”, as Martin Schwartz writes in “Pit bull: Lessons from Wall Street’s Champion Trader” (Collins, 1999), a book by the way I recommend everybody to read. Don’t worry, this is only a philosophical question, not a sexual one. I want to investigate today if to be what is commonly perceived a “good” trader you are supposed to be a private trader that puts hit mouth where the wallet is or you can also be an institutional trader that rides other people’s horse. If you try to reply to this question you will understand a lot of what is happening out there over the markets. It is not a trivial topic, indeed. It is the most important one in our business.
If you reply to that question you will also reply to other pivotal questions like, for example, why everybody chase after the big dogs’ money. Let’s say that if you charge 20% over the profits of the big dogs’ money it is enough to make a 10% return over 100 millions of euro to bring home 2 millions of euro as personal remuneration. But put it in another way: if you trade 100.000 dollars and you want to bring home 2 millions you need to make a yearly return of 2.000 %. And this is a difficult task to achieve, believe me. Don’t you trust me ? Maybe you know the name of Jim Simons, that biggest algorithmic trader that manages a fund whose name is Magellan and that he made a cumulative composite yearly return of 40% over the last 15 years. And he became a world legend. A legend that even overshadowed the former George Soros’ fame. Soros did 40% for just … 10 years in a row. These are rough figures that are even not so much precise but that are putting you in the right perspective.
Making money is difficult. “If I consider also all my belonging invested in real estate and bonds – comments anonymously the biggest stock intraday trader in Italy – I would say that I made a dear whole 30% yearly composite return since 2000”. A wonderful result, I would say, if I think that this intraday trader sits over many millions of euro. But 30% is not 2.000%, a return, the latter, that is possible and that many traders did, but during some fortunate periods that happens once in a life (the 2000’s stock bubble for example). And usually the quicker you make the money the quicker you lose it, in cocaine or over the markets it does not matter, you lose it.
Life is hard, over the markets and outside the markets. So that when you come down to earth you discover that it is better to be an institutional trader than a private one. The motive is simple and compelling: you make more money with a smaller effort. But does this mean that an institutional trader is better or worse a private one ? If the markets are competitive it means that somebody will check in a way or another if you credible or not as an institutional money manager. So that it is supposed that you have an edge even over successful private traders. Sometimes happens that you do not have indeed, but often you have or you are supposed to.
What is the price for this ? Do not worry, there is always a price in life. And here too. The first price is bureaucracy. The second is that you will be very busy in convincing other people that you are good and not just yourself. The third that you can lose you reputation and, after that, your self-esteem.
So I present arms to Mr. Thomas Stridsman, the author of two acclaimed books on systematic trading such as “Trading systems that work” (Wiley, 2001) and “Trading systems and money management” (Wiley, 2003), and father of many systematic traders around the world (myself too among them), that decided to join the money management industry and launch the Alpha Commodity Fund in cooperation with Alpha Kraft AB, a Swedish money management company in the energy sector. A difficult task lies ahead for him. I think his hedge fund returns will be among the most researched and watched all over the industry because of his reputation and fame. And me I will be sitting in the first row to follow the show. Mr. Stridsman has a unique feature for me: I always manage to learn something from him. So the show can start !