Really Rich Guys - Top 10 Traders

[crazy canuck]

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I thought Buffet had been a stud for three decades or more. Am I wrong? If not, is he a complete outlier or aberration? If not, what's the problem in your correlation between Kelly curves and market success?

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Yes, he is a stud. But like DcifrThs said the top traders/investors must be taking on excess risk, otherwise they would not be on top.

Maybe there is an investor with Buffet's exact skill who blew up after 10 years and nobody knows about him. And there might someone else who made good money for 30 years but not money people know about him because he didn't take on too much risk. For example Ed Thorp (yes the blackjack guy) comes to mind.

In Kelly betting the percentage of the current bankroll to be bet is proportional to your edge. If you're edge is 10%, it means that you have 55% winners in a game where the 2 outcomes are doubling your bet or losing it. So this means your supposed to be betting 1/10th of your roll! If your edge is 20% (so you have 60% winners), you're supposed to be betting 1/5th! While you'll never go bust the variance of such a strategy is extremely high.

Therefore, even half Kelly is too much risk and quarter Kelly seems to be much more optimal.

[ChipStorm]

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my question would be, can an average joe do this? can an average joe pick up a bunch of books, learn the market and make himself rich if he is good enough and lucky enough? don't you need money to make money in this field? (unlike poker where a small deposit can lead to great things if you're good)

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Short answer is no. I work on an energies trading floor (gas, coal, electric power), one of the very few to have survived and prospered over the last 10 years. (I've been there 7 years.) IMO:

1. Poker skills would and do transfer well: successful traders are analytical, highly disciplined, almost never tilt. But,

2. Successful gas traders know much more about the gas market than could be learned from books (and there are some pretty specific books). It's complicated, and they need to be 100% up on its structure and on current events. The books only get you to rank amateur status.

3. Successful traders require significant organizational support: capital, custom analytical tools, colleague traders working related markets. It's a team game. While the distribution of return results is going to be insanely broad (6-10% one-day moves in gas occur with alarming frequency), trying to go the gas market alone would amount to infinite arrogance.

[IggyWH]

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This sounds a lot like: "Let's connect to where the gas is actually coming from." And well, that sounds like a good reason to me.

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They had about 5 possible tie in spots planned when this project started about 2 years ago. They made a decision on this spot and have ran with it from day 1. Now that most of the pipe is actually in the ground, they've decided to change the tie in spot.

Notice that you can't just say "put the pipe here" and go that next day and install it. It's at least a year process to do all the studies you have to do and then get approval for it.

This is just normal for them. They change things at the last minute constantly. Up to the time we submitted for the permits, we had two seperate reports made up for two different routes. Only on the deadline date did they decide which route they were going to use, which meant all the money put into the other route was thrown away. Their amount of waste is just insane.

[bottomset]

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stox,

Let me translate for you:

Barronspeak: "guy who owns the hedge fund i work at is easily worth 20bil."

English: "guy who owns the hedge fund i work at may be worth over a billion dollars."

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yeah only 4ppl are at 20billion in the US, 1billion could happen

[DcifrThs]

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barron - 20billion?

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i may be off as i tend to exaggerate. el d translated for you a bit too much on the downside. its a very large amt. though and not near 1bil.

he has been managing this fund 2/20 for ~ 15 years. we've generated about 12% annual excess return at about 11.5% risk over that time (risk-adjusted return of like 1.0). that is just the hedge fund. we also have a passive only asset management business that is 50bps on net asset value in fees + admin fees etc. we have in total including everything >160b in aum.

He is basically the sole owner as he has retained a vast majority of the business. the rest is to the next 3-5 top guys.

20bil may be excessive but 1bil is also excessively low and off.

i think the value of this firm right now is like $6-8 billion. maybe a little more. he has reinvested everything he's earned back into the business (passive only which has had a total return of ~11%/year at about 11% risk. in excess return space the risk-adjusted return is like .7). this is separate from our AUM (on which we charge fees).

all in all, i would be SHOCKED if he was worth less than $7-8billion. so while i may be wrong about 20, the # is still staggeringly high.

and the POINT is that you dont hear about the skilled guys not trading for public funds. and you dont hear about the consistent winners, who, in expectation would kill the top traders. you only hear about the guys who have had a ton of luck in the past.

we would expect at least 1 person to have Buffet's track record over the history of time that investors have been in the market even if we assumed nobody had an edge.

only reason i wrote the initial post was to make a point that the really rich guys are actually "really lucky guys" who have had more luck than skill in all liklihood given where they are now.

i would be more impressed if they stayed at that level for some extended period of time.

It's like the period of 1990-1994 in the bond mkt or 1990s-1998 in the EMD market. there were a few guys who just freaking killed it time and time again. top 10 list every year for like 4 years, but eventually, the market didn't act like it did in their memory or the recent past and blew them all up.

this will DEFINITELY happen to people soon as the volatility & implied volatility in mkts now is exceedingly low on even short term charts. on long term charts it is laughable. to compensate, those who have return targets to hit use too much leverage. the blip that occurred in feb was regarded as HUGE, but it was just a blip. mkts have already reverted to jan. levels of confidence.

if the yen has a big move, or some event occurs that isn't just a blip, the next day-week's papers will probably have at least 1 or 2 incredible stories of some "golden kid" gone busto.

his response will probably be "but the markets hadn't done anything like that for a long time. it was a rare crazy event that caused me to blow up." sure, but you didn't take into account that rare crazy events do happen in fat tailed distributions like markets. you would have almost certaintly blown up in any case over time.

sorry i'm babbling too much here. i think you get my point.

and i apologize for the exaggeration. i'll try to translate my claims to reality or el d speak... until the next time i exaggerate by too much (i'm a realist...it'll likely happen again).

l8r nick.
B

[econophile]

barron,

if your boss is in the 7 billion range, it should be pretty easy to find him here: http://www.forbes.com/forbes400/

[El Diablo]

Barron,

I don't get this:

"he has retained a vast majority of the business. the rest is to the next 3-5 top guys."

"i think the value of this firm right now is like $6-8 billion. maybe a little more."

"he has reinvested everything he's earned back into the business"

"all in all, i would be SHOCKED if he was worth less than $7-8billion."

BTW, all accounts I've read have him "only" earning between $100-200 million each of the last two years.

[Benal]

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don't you need money to make money in this field?

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For the most part yes, although anyone can get lucky with some penny stock that ends up curing cancer or something.

[DesertCat]

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Maybe there is an investor with Buffet's exact skill who blew up after 10 years and nobody knows about him. And there might someone else who made good money for 30 years but not money people know about him because he didn't take on too much risk.

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Someone who has Buffett's skill set would never blow up. He takes little risk, never uses leverage except in some small merger arb subsets of his portfolio. He's got 50+ years with only one down year (-6%) so his results aren't volatile. Most top value investors follow the similar strategies, which is why they don't blow up either.

The most interesting traders to me are Cohen (SAC) and Simons (Renaissance). Both charge massive fees, have large funds and still crush the market after fees for long periods. Simons supposedly uses much less leverage than other funds. Both of these guys should be figments of our imagination according to "A random walk down wall street".

[ozyman]

New York magazine had a pretty in-depth feature this week on the hedge fund industry and some of the major players. For anyone interested in finding out more, its worth checking out.
Behind the Hedge