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Hi Scott,
the point of that post was to give some concept to list readers of the
size of the problem they are dealing with..any misevaluation of the
size of the problem comes straight back to the human traits of hope,
fear and greed
1)that while money management rules of 2% or as with many
professionals, down to .02%, are useful, they are but one very small
part of a much larger system/portfolio market/timeframe
diversification problem
2)That the professional, with all the advantages described in the post
and many self-imposed trading constraints...02-.05% risk.40-70
markets, using an average 10-25% initial margin, 24 hr trading,sector
correlation analysis(in longer term systems) etc etc will still have 1
in 7 year drawdowns(unpredictable of course) of:
short-termers 8-20%
long-termers 12-35%
Despite thsese drawdowns..when you add them to average initial margin
used and you look at the discussions on this list, you can then
understand why most individuals have no chance of success
3)That professionals do not carry the personal risk of losing
money..they share only in the upside to the tune of ,depending on
average return distribution, 4-7% p.a of capital managed..the true way
to make money out of the markets..leverage a call option using other
peoples money with the premium being the research costs..something
that all list members have one way or another
4)that they ensure that their systems are parameter "robust" over
multiple markets even if there is some slight "tuning" per individual
market..i.e they don't create a great "system" on coffee or jap bonds
and count the days to retirement risking their own cash
5)They still require a minimum account size these days handling
current volatility risk of at U.S$1m and more like $3-5m
e.g most might only trade per $1m
longer term systems
1 Jap govt bond ($1.5m)
1-2 coffees
1-3 s&ps (new contract)
1 Dax
short term systems..limiting bet size to .02-03% per mill
2-3 coffees
1 jap bond
3-4 new s&ps
2 dax contracts etc
while i agree with your comment about hedgers transferring risk and
trends coming from that direction, i was also making the point that
with all the advantages listed above and many more besides, many list
members are eventually going to feed this machine through complete
lack of understanding of the true odds against them..!!! any trading
joy they have may be a lucky accident in time and thay have neither
the experience or the resources to test otherwise...even if they did
have , they still have to deal with their own fear and greed so one
way or another...
return expectation for professionals are as above..they are proud to
make 1.5 % average margin employed consistently, to average 1 to 1.5
times worse (7 year) drawdown per annum and large fund allocators such
as commodity corp(goldman sachs) are happy to allocate on that
basis...many of them still go out of business..
regards and good trading..don't let this post temper your enthusiam
for the markets..but do think very carefully before you give up the
day job based on your great s&p,jap bond or coffee system..systems
also work well in other markets of course but these are the easiest
markets to fool yourself that you have a trading "solution"
sam
---Scott Hoffman <trader20@xxxxxxxxxxxxxx> wrote:
>
> How does one find out all this stuff? I've havent' read very many
disclosure docs, but the few that I have read don't seem to have all
that info that you give.
>
> Very interesting post.
>
> I like hearing about the methods of the only group of people that we
*know* make money in this game. Everybody else can say anything,
exaggerate, outright lie, but these guys are audited.
>
> My own research has led me to believe that the turtle / Donchian
breakout approach has many merits the most important to me being it's
consistancy over decades across many markets using with such simple
buy/sell rules.
>
> "But how can that continue to work if everybody's doing it? In a
zero sum game, everybody can't do the same thing and make money" you
say.
>
> I say that long term trend followers are to a big extent trading
against hedgers rather than other specs. Hedgers are not playing the
long term trend following game. Their purpose for being in the game is
complementary to specs. This is in contrast to short term traders who
are principally trading against each other. This relationship is
competative rather than complimentary. Hence the difficulty of success
short term trading versus long term trend following.
>
> The thougths expressed above are just my opinion, and holding the
exclusive license to my own opinions, I reserve the right to change
them without notice :-)
>
> Scott Hoffman
>
> -----Original Message-----
> From: sam hunt [SMTP:samh_100@xxxxxxxxx]
> Sent: Sunday, August 02, 1998 6:02 PM
> To: Robert W Cummings
> Cc: 'List, Omega'
> Subject: Re: Concluions: Rethinking the 2% MM rule...
>
>
> Hi Robert,
>
> {There appears to be discussion on the list over several areas of, in
> my opinion, overlapping and related system trading production
problems.
> I would like to briefly share with you some of my views in the
> following areas.
> 1) Optimization
> 2) System, market and portfolio risk
> 3) Money management
> (Actually I've changed my mind.read below)}
>
> Before I do, I would also like you to consider the following thoughts.
>
> 1) There is currently 5-7? turtle like traders (25-40 donchian type
> breakouts) managing $2-3 billion?
>
> 2)there are several managers managing simple range(volatility)
> breakout type systems. Dominion($250m),Crabel($130m)
> Grinhams($200m),Northfield ($150m),etc etc
>
> 3) The longer-term traders are taking out 1500 -2500 RT per million
> under management, the short term in the second group are taking out
> 4000-6000 RT per million under management.
>
> 4) All of them need to manage minimum account size of $2-3,000,000.
> They commit varying daily average margin amounts of [the short
> termers] 8 -15% of account size and the longer termers 14-25%
>
> 5) All of these traders would have IT budgets of $200-2,000,000 per
> annum or more.
>
> 6) All of these traders need to place multiple systems and market
> orders over 30 -70 markets worldwide to have a chance of succeeding
> and then some still fail
>
> 7) Many of them have drawdowns {daily} is there any other? Of 10 - 35
> %(the longtermers) and have annualized returns of 10 - 30 %, monthly
> STD of 3.5 to 10.
>
> 8) Many of these traders(especially short termers where bet size is
> important) only risk .02% on a trade, run extensive correlation
> analysis to reduce correlated sector risk (on longer term systems
> where bet size may still only be .05%) and trade over multiple time
> frames to achieve further diversification.
>
> Given that any sensible ideas I have as described in the first part of
> the email need IT budgets of the sort I have spoken about and given
> that this essentially is a Zero sum game(- turnover(broker) tax 0f 10
> -15%) and given that there is a large body of managed money out there
> (a small sample above) taking money out of the markets
>
> And that they need to get their trading profits from somewhere..from
> whom? And that the list above is only a small subset to which you can
> add kovenor(2 bill),John Henry(2.5 bill),AHL(1 bill),Tudor Jones(?),
> Mint(500m) etc etc
>
> Lastly consider that these system professionals are trading for a
> living but have no downside risk unlike many list members..they make
> 4-7% of funds under management..
>
> Therefore for them 2% is often as low as .02-.05% and with all of the
> above advantages they still have 1 in 7 year drawdowns of 10 -35 % of
> a large portfolio while only commiting minimal amounts to margin
> .then...
>
> Food for thought. i should also like to thank the Mark Browns, Pierres
> and others who give of their time to contribute
>
> Good luck and good trading
>
> regards
>
> Sam
>
>
>
>
> >
> >
>
>
>
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