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Nov 22

How I Kicked The Fund Managers Butts

Categories:

Big Picture, General Trading, Risk Management

by Rogue Traderette

In Which Rogue Traderette Has Illusions of Grandeur

I have to say that there is nothing that starts my day off better than finding out I’m more brilliant than I thought.

I received this graph by Jez Liberty via Chris Tate, and it really is very illuminating.   It seems the most prominent fund managers in the world are having a bit of a rough trot.

I’ve read countless times in blog-world that 2011 has been the trickiest year ever to trade, and this graph would suggest that those fund managers most likely agree.

So, back to my brilliance then.  I beat them all.   Yes, I really did.

But before you come banging on my door with all your millions of dollars, it must be noted that sticking your money in the bank for the last year would also have beaten this lot.

So, what happened?  Why did these guys do so badly the last year, when a normal un-fund-manager-trader-girl like myself managed to make more money than I ever have?

Now I might be wrong, but I reckon a large part would come down to one simple thing.

Investors.

They’d have to drive a girl nuts.

Let’s be honest, having a partner to consider in our trading can involve a world of hurt, simply because they don’t understand the mechanics of what we do.

I had a situation this week where I told my husband I was currently in a tiny drawdown (from equity peak) of about 2%.  I’d not mentioned it earlier, because there was nothing to mention – it’s nothing, totally normal.

Totally normal for me, that is.  Not totally normal for him.  He’s used to bank interest, and regular positive movement in the account.  What he’s not used to is ‘losing money’, lumpy returns and periods of drawdown.

I was lucky – all it took for me to put things right was a bottle of wine and a quick explanation of random individual outcomes and positive expectancy.  Easy, right?

But what if I had 100 people flipping about a 2% drawdown?  I don’t think a bottle of wine would do it.

People get very protective of their money.  They’ve worked hard for it, and they trust you.  They trust you to make money for them, but more than that they trust you not to lose it.  It’s hard – very hard -  for a non-trader to fully accept the fact that what we do entails risk, and the possibility of loss.

And while they say they understand, they usually don’t.  In theory they understand, but when they are actually faced with a real loss all that understanding disappears, overwhelmed by the reality of their shrinking wealth.

When you’re managing other people money, returns matter.  For me, they don’t.  Well, they do but not in the same way.

I have no definite timeframe that I need to turn a profit by.  I don’t have investors who want a quarterly report that shows capital appreciation.  I don’t have 100′s of people behind me who don’t understand the nature of investment.

As private, individual traders we are incredibly lucky.  There is no pressure for us to perform, so if we don’t like the market we can sit out and wait.  I don’t believe many fund managers have that luxury.  People don’t give their money to fund managers only to have them sit their funds in the bank – investors can do that themselves, after all.

And it’s precisely because of this flexibility that as private, individual traders we should be beating these guys.  We can do as we wish, as we see fit, without limitation.  Don’t forget that sitting out of a crappy market IS an option for us, and that we should use it whenever the occasion calls fo it.

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  • Bill

    So what do you trade now Jess instead of the ASX equities? do you still use trend following principles just in a different market?

    Bill

    • http://roguetraderette.wordpress.com Rogue Traderette

      Hi Bill, I’m still trading asx equities, and fx too :)

  • http://trendwhizo.blogspot.com/ Trendwhizo

    check out the Hedge Fund Global Index – your ego may bloat further. It’s down 8.33^ YTD. http://www.bloomberg.com/apps/quote?ticker=HFRXGL:IND

    Further, you may want to see strategy specific one so that it will be an appropriate comparison. Various strategies, which have indices are: distressed securities, equity hedge, equity market neutral, event driven, macro, merger arbitrage, and relative value arbitrage

  • Darren

    Test test test test. In my experience equity indices suck for TF. The stuff that rends nicely is currencies, metals, fixed interest. That kinda stuff. I think this is maybe because these respond massively and long term to major structural shifts in the financial environment that take long periods of time to play out. Take, as a crude example, the RBA cash rate. The RBA doesnt go “cut, raise, cut, raise, cut,raise”. They respond to big fundamental shifts in the economy which take time to play out so they usually go more along the lines of “cut, cut, cut,cut, raise, cut, cut” and vice versa. So what happens to Aussie bonds/bills in that instance. Big, long trends. Same with something like gold and the whole “inflationary, printing money, gold is the only true store of value” theme. Another thing to consider. LUCK. Imagine you started the Rogue Traderette Trend Following Fund in Dec of 08 and your system immediately flashed you a short signal. You would look like an absolute genius riding your “short the world” position all the way down. Now compare that to starting up the same fund with the same system in Dec of 09 and sitting through all this chop! Big difference. Hence why you need to trade a LOT of markets and do it with the same system over an extended period of time.

    • Darren

      Dec 07 vs Dec 09 I obviously meant!

  • Darren

    Pretty simple really. NOTHING works all the time. There is no strategy out there that suits trending markets, ranging markets, volatile markets, calm markets. Doesnt exist. Every system/method will experience drawdowns at some point. Its the law of the jungle. If someone found something that did all the above, eventually everyone finds it and the edge is arb’d away. This year has been one where the environment (lots of choppy trade) doesnt suit long timeframe trend followers where they get whipsawed constantly. Why do you think Goldmans can have such long winning streaks? Because they have enough capital to cover EVERY strategy (amongst other reasons of course). When the trendfollowing guys are losing, the arb guys are winning, etc. Spreading capital over a myriad of strategies = smoothed returns. One trick ponies dont have that luxury and need to sit through inevitable tough periods for their chosen strategy. Its no surprise that MANY firms have either gone down the path of diversifying strategies (Abraham trading as an example trades both a long term trendfollowing as well as a short term mean reversion type stuff) or dialling the risk way down and looking to gather bigger AUM’s (they would rather have 5Billion under management and return 10% with a max 5% drawdown as opposed to shooting for 30% with a possible 20% drawdown).

    • http://roguetraderette.wordpress.com Rogue Traderette

      Hey Darren,

      You’re right, nothing does work all the time.
      My post was more focused on the effect investors can have on decision making and a ‘possible’ reason why so many of these funds ignored the high risk in the market this year rather than sitting in large quantities of cash. These managers would have to realise and understand the flaws in their system, and should have a method to keep either them in cash, lower their risk or turn around entirely during market conditions that are crappy for their style of trading.

      I am also a trend follower, but was able to take advantage of the crash rather than being on the wrong side of it like so many of these guys apparently were.

      • Darren

        I got ya.One thing you need to ask yourself. If there WAS something out there that could meaningfully lower the losses in a trendfollowing system when conditions didnt suit it do you not think they would have found it by now? The list you provided is a list of the BEST trendfollowers in the world. The top 1% of the top 1%. And they are all having tough years. But in their universe, 1 year is meaningless. Trendfollowing is all about trading a LOT of markets (so that your chances of catching one that is trending are greater, all the guys you listed above trade a LOT of mkts, 40+ probably on average), understanding that drawdowns are gonna happen, and dialling your risk in so that your inevitable losing periods dont suck so badly you run out of money or your investors get sick of you and lose faith, and your good months make them smile so big they forget the bad ones (winners bigger than losers). Oh, and having the courage/balls to stick to your system through the drawdown and not abandon it in the search for something “better”.

        • http://roguetraderette.wordpress.com Rogue Traderette

          You make very good points. I am not a fund manager, and don’t personally have the stomach for a 30% drawdown which is why some of the returns look so hideous to me. Also the fact that the primary market I trade (ASX) has been junk for trend following for the last 5 years has made me quite keen on the idea of quick turns and the need to sit out occasionally.

          If I had’ve persisted with a TF system with ASX equities for my trading career I would be bust by now. It’ll be intereesting to see the results of these guys if these market conditions persist for an extended time. Or even another year, for that matter.

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  • Arbinvestor

    The biggest edge an independent trader now has is time. No prof trader has this luxury. It’s a new strategy in and of itself – particulary in equities. I call it Time Arbitrage.

    • http://roguetraderette.wordpress.com Rogue Traderette

      Sounds interesting! Good luck with it :)

  • Grotaiche

    Hello Jessica,

    It should be noted that this chart comes from Au.Tra.Sy ( http://www.automated-trading-system.com/trend-following-wizards-october/ ) and it concerns only trend following funds. As far as I know, no mean reversion, no value investing, no nothing. Just have a look at most charts for 2011 and you will see how hard 2011 was for trend followers.

    Also, most of these guys trade long-term positions (e.g. Bill Dunn will keep winning positions for months or even years if needed), no day traders here. So, like many trading returns, it is important to have a look at the big picture. Using Bill Dunn’s example again, his WMA fund has been returning ~14% annually since inception which was in… 1984 (see http://www.iasg.com/groups/group/dunn-capital-management/program/world-monetary-assets-system-wma ).

    So in my opinion, these funds’ bad record YTD is not down to their clients pressuring them. Most of them, if not all, would probably trade the same way if they had no clients at all. For them to say the drawdowns are mostly due to investors (i.e. their clients) would be denying their responsibilities and I don’t think that’s a trait of a good trader :)

    I suggest you read more about those guys and their systems ; Au.Tra.Sy is a start, then there are also several books around like Michael Covel’s Trend Following.

    • http://roguetraderette.wordpress.com Rogue Traderette

      Thanks so much for your detailed response! I didn’t actually know these were all trend-following systems, so that is telling because 2011 absolutely sucked for TF systems.

      I’ll check out those links, and again thanks so much for your response!

  • shaun noll

    great post and unfortunately all too true. i guess I would respond with what we need to see is more managers operating on a 100% profit based fee system ( I like 0 and 25) so that if/when they sit in cash their clients aren’t paying them to do so and should be less upset about big cash holdings.

    But the other side of the coin is that the longer I do this professionally the more I realize that in many ways choosing the right clients as a professional investor is perhaps more important than even how or in what you invest….

    Having the right clients is a blessing and having the wrong clients (ahem….fund of funds) will likely be the death of you.

    • http://roguetraderette.wordpress.com Rogue Traderette

      Thanks Shaun, it’s great to hear a pro’s view :) I appreciate your response – very interesting, especially re fund of funds.

  • Chip

    The issue is not large vs small. Example Ray Dalio. The issue is the relative merit of the managers. The fact is that there are lot of very average fund managers out there, and they are all parked in the same hedge fund hotels. Liquidity can be an issue with very large positions esp in equities with small floats.

    • http://roguetraderette.wordpress.com Rogue Traderette

      I agree regarding merit, there are a probably a myriad of reasons why the big guys did so poorly (totally ignoring the evidence the market was about to tank is one ;) Re size and liquidity being a disadvantage – call me harsh but managing large amounts of money is a fund managers job, and it shouldn’t affect their ability to generate a decent return. They just need strategies in place to deal with it. Hence “manager”…seems like they didn’t manage at all, really!

  • Random person

    You are missing something big here: size. You can buy and sell a few thousand shares of xyz in a small account without might the market with you. Not so a billion dollar account which makes it more difficult to trade nimbly.
    We are all beating the fund managers.

    • http://roguetraderette.wordpress.com Rogue Traderette

      Who says I’m trading a small account? ;)

      Seriously though, you’re right – we do have lots of advantages being smaller, and if we really are all doing better than a negative return that’s fabulous news! :)

  • Nick

    sounds like my dinner table conversations too.

  • Tom Buelte

    well put Madame – common sense with served with wit and credibility.

    • http://roguetraderette.wordpress.com Rogue Traderette

      Thankyou Tom :)