Why can ordinary day traders make 200-300% profit per year, while hedge funds only have a 20-40% ROI?
Day traders are only responsible for themselves: HF traders are not. Sticky funds and fast funds. This is not because they can generate good returns, but because their clients do not give them enough leeway. Therefore, they can only get into trouble every month.
HF is a fixed cost business
The operation costs of any HF are between 50 and 1 million US dollars per year. Although there are cheaper options, these funds are not at the institutional level: retirement fund managers simply won't look at them. All of this happens before the person in charge takes a cent.
Now, contrary to the common belief, HF is a fixed cost business. You need to pay the bills, for which you need to attract investors and increase your AUM. Performance alone cannot pay the bills. Performance attracts investors who pay the bills. Those who come in with 10 million US dollars and think their performance can cover the costs will always stay at 10 million US dollars.
HF is expensive but underperforming.
In the investors' minds, why invest in HF when better returns can be obtained elsewhere at a lower cost? Yes, yes, yes, I understand your point about low correlation with the market, downside protection, and asset class diversification, but who cares: an 8-year bull market often weakens people's perception of risk, frankly. Every time the market has a problem, those clever people take a big fall. It's a fact, but it's also related to the nature of the people they cater to.
Sticky funds vs. fast money
HF is struggling to attract sticky retirement type funds. The California Public Employees' Retirement Fund (Calpers) has exited the HF game, and many other endowments and pensions have followed suit.
Maintaining operations costs about 50 to 1 million US dollars. Therefore, they sell to the fast money fools who put pressure on them. If you underperform for 2-3 consecutive months, or if you make me lose 5%, I will end our cooperation. Smart HF people don't like those tense investors, but they have no choice. These Sherlock are the people they have to perform plastic surgery on to lock their mouths onto these money-making machines, in order to one day reach the institutional scale.
What happens when you're not allowed to lose money? You won't take risks. When you win this month, you take the money off the table. When you lose, you reduce risk. You never allow positions to fully develop.
There are three main points:
1. Assets and liabilities do not match: HF uses short-term funds to provide funding for its LT strategy. This doesn't work. This is actually the core of the problem, everything stems from this.
2. Poor portfolio management skills: My career started with building a portfolio management system. Imagine relying on instruments to fly. If you don't have good instruments for landing in foggy weather at night, the game is over. When I look at the portfolio management systems of my HF partners, they are definitely struggling. In 15 years, I have only seen 2 investment-grade systems. In short, these people are flying blind, no wonder they fail.
3. Inability to short sell: Selling futures as a hedge is a tourist patent. Most people from long institutions think they are good at short selling. Two years later, they gave up short selling. You don't learn MMA by signing up for UFC octagon cage fights, you first train in the gym.
Institutional hedge funds
The success of SAC/Point 72, Millennium, and Balyasny lies in their adoption of different philosophies. Investment is leveraged and managers have very strict stop losses. Therefore, they create 15-18% annual returns for their clients. Now, as a manager, a 5% interest rate would halve your AUM. A 7% interest rate would force you to stop losses. This directly suppresses managers' willingness to take on additional risk. Few managers have the patience and discipline to record mundane returns month after month.
Will individual investors join the HF manager
In the CTA field, some people have indeed done so. That's how Paul Tudor Jones started. However, the rules of the game have changed. It used to be easy. Ken Griffin started trading bonds in his dorm room. Now, according to him, he can never do that again.
I have my own views on this. I used to want to start a hedge fund. We were quite advanced at the time, but the cost of the whole thing surprised me. I could have gone bankrupt before we reached investment grade. So, I changed my mind. I promised myself that I would do everything I could to never need investors. It's been a long and tough road, but now we don't need investors anymore. Trading has put wine (my favorite food) on the table.
Actually, there are two (not four!) answers:
1. Most of the 'ordinary day traders' you hear about on YouTube or in advertisements actually don't make any money.
2. Regardless of what you think, the best trades require a tremendous amount of effort. This means that hedge funds need to focus on trading systems and ideas with the highest/nominal/profit expectations. This is in stark contrast to many day traders who have (very) limited cash on hand and are happy to double their hundred dollars. Hedge funds are more willing to focus on making 10% profit on one million dollars, which are rarer opportunities since there are more professionals pursuing them. This also means that they leave smaller opportunities for small traders, and may occasionally miss some opportunities.
3. Scalability: Even if hedge funds discover the same opportunities, they will significantly push up market prices before they reach the desired volume. This makes the cost of establishing positions higher and ultimately greatly affects their returns. This is essentially diminishing returns.
4. The premise of doubling your money every year is a bit absurd. If you start with 0.1 million, by the end of the second year it will be 0.9 million. By the fourth year, it will be 8.1 million (please note, this is a small-scale hedge fund). Fast forward ten years, and you are five times richer than the richest person in the world, Jeff Bezos. Then, in the 15th year, you have to somehow surpass everyone else and squeeze 1 trillion dollars from the market. So I can say with certainty that no one's career in the world can be summarized as 'doubling every year.'
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I am not a day trader; I am a medium to long-term strategic investor in specific stocks (currently, only Tesla in the US stock market), with 40% of my total positions allocated to arbitrage of sub-trends. Some of these 40% positions engage in short-term trend battles, typically holding positions for a few days. However, I might be able to help you answer this question...
As a small trader like me, I have two advantages over large funds:
- My trades do not affect the market.
- If I don't know what's happening in the market, I can sit back and observe until I figure it out.
The small contracts I buy, which are less than 10, will not impact the market. I can enter or exit all markets I trade without affecting the prices. This means I can time my entries and exits down to the minute and get (very close to) the precise execution I want.
When hedge funds trade, they can't buy 10,000 contracts at a price of 4567. They usually have to start buying when the market is still falling because their buying volume will be seen by all other hedge funds, and these funds will have the opportunity to take the opposite side of these trades or start buying themselves and drive up the prices. The main reason for market volatility is when enough large players sell or buy at the same time, and because they have to largely sell or buy from each other, their own trading will push the market in ways they don't want.
As a small player, I can observe the moves of all the big players (even though they try to hide their sales volumes, but I can see...) so when the market starts to fluctuate, I can join in and follow.
I often stop understanding what's going on in the market. It doesn't feel good, but now I know when this will happen, and then I can exit and watch from the sidelines for a while (or move to another market). Sometimes the market goes into hibernation or starts oscillating in weird ways, making trading very difficult - I don't want to trade in those markets.
Big players don't just sit and watch; they have clients who want their money to be actively invested in a particular business and generate profits. If these big players hold a large number of long positions in XYZ, and the price of XYZ starts to move unexpectedly, they can't just dump their huge positions because that would cause the price to drop; they have to slowly sell these huge positions, and that will take quite some time. As for me, my "huge position" in XYZ is laughably small - I can always exit that position in a matter of seconds and wait for other opportunities.
Who is the most successful hedge fund manager in the United States?
The most successful hedge fund managers in the United States include:
- Ray Dalio - Founder of Bridgewater Associates, one of the largest and most successful hedge funds in the world. Under his leadership, Bridgewater Associates has achieved significant returns over the years.
- Steven Cohen - Founder of SAC Capital Advisors, one of the most profitable hedge funds before transitioning into a family office. Cohen himself has accumulated billions of dollars in wealth with his keen investment mind.
- Jim Simons - Founder of Renaissance Technologies, a quantitative hedge fund that consistently delivers outstanding returns through its sophisticated data-driven investment strategies.
- John Paulson - Founder of Paulson & Co, who correctly predicted the collapse of the real estate market in 2008 and profited immensely from it, earning billions of dollars.
- David Tepper - Founder of Appaloosa Management, a company that has consistently generated above-market returns, making Tepper one of the wealthiest hedge fund managers.
- George Soros - Legendary investor and founder of Soros Fund Management, known for his successful bets on the British pound and other currencies.
These managers have demonstrated excellent skills in investment selection, risk management, and creating long-term excess returns for investors.
James H. Simons is clearly the top choice. But I would also recommend interested readers to take a look at the biography of David E. Shaw. His profile is somewhat similar to Simmons' (at least from a shallow and insightful perspective), and in my opinion, he has shown more boldness and volatility in both his failures and successes as a scientist and hedge fund manager. This might make his story equally interesting. By the way, when Jeff Bezos (founder of Amazon) worked on Wall Street, he was Shaw's boss.
With the death of James H. Simmons and his take of a portion of his massive wealth, the influence of Renaissance Technology in the tech industry has been declining. As members of a scientific team consisting mainly of mathematicians (with a focus on statisticians), physicists, and computer software engineers, each individual has their own unique personality. It is difficult to find a leader like James H. Simmons who can hold his ground. During the lowest point of Tesla's stock price, Renaissance Technology should have had top-level analysis and operational strategies.It should have been planned and executed in a step-by-step manner, with bold and decisive large-scale building and positioning.However, Renaissance Technology chose to reduce its stake in Tesla, which cannot be underestimated due to their past reputation. Wall Street's major institutions have no shortage of followers. When Tesla's stock price stabilized and began to rise significantly, Renaissance Technology's investment strategy of increasing holdings after such significant gains is very different from the aggressive style of the lion and tiger-class large hedge funds they were known for in the past, which is difficult to commend. Here, we can also see that it is extremely difficult to overcome the weaknesses of human nature such as trying to avoid greed, fear, and the desire for rising prices and falling prices. Without surpassing these constraints, it is difficult to achieve great success in the financial market.
It should be noted that Renaissance Technologies LLC's investment strategy and operating methods are not suitable for individual investment trading and small hedge funds.
Jim Simons is the only person who has solved the market problem. We know this because his Medallion Fund has generated annual returns of over 70% in the past 30 years.
This is the flagship fund of Renaissance Technologies LLC, the hedge fund founded by him.
The fund does not accept external investments and is wholly owned by its employees.
Some estimates show that the flagship fund has generated over $150 billion in returns over the past 30 years. Simons' net worth is approximately $23.5 billion.
The company does not have any financial professionals. There are no MBAs or business school students. They are all mathematicians, statisticians, scientists, engineers, etc.
The company did not cause any sensation, there is no advertising, nor did it receive any attention. There are no hot discussions in the news.
They have found a solution, and in Simmons' own words, no one performs any manual trading. Everything is done by a system built by more than 300 employees.
RenTech has a larger fund size, but its performance is far from comparable. Other companies manage assets that far exceed the Medallion Fund. However, the performance of their flagship fund cannot be compared to it. Their performance has consistently exceeded that of every entity. No fund can match Medallion, which can consistently generate 70% annual profits on the managed $10 billion assets.
If you had invested $100 in the fund in 1988, by 2018, the investment amount would have reached $0.4 billion.
From all aspects, Simmons and the people he hired have a deep understanding of the stock market. You can't say the same about anyone else.
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
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成熟投资者：格局，概率，取舍。没有格局必然急功近利。不计概率会把运气当技术。不懂取舍，有所不为，最后必落入陷阱和圈套。
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