Really Rich Guys - Top 10 Traders

[DcifrThs]

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Someone please enlighten me about those compensation schemes.

50% of profits? 3% plus 30% of profits? Wow. Is there a law that prevents these guys from just taking some kind of coin flip (and possibly lie about it) once they have earned the trust of investors?

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possibly... there may be a law forthcoming but this is capitalism and let the buyer beware, right?

this is why betas are so much easier to find than alphas. it's freaking HARD WORK to find an alpha manager who

a) provides you with a diversified return stream

b) does it without incidentally delivering a beta along with it (i.e. a manager whose benchmark is US Large Cap Equities & whose returns are like 80% correlated to the benchmark. in this case, the manager is really not delivering his tactical decisions. he is delivering basically the same thing as investing in US Large Cap Equities plus a little deviation)

and,

c) is likely to continue delivering that return giong forward. i.e. a manager with a deep understanding of risk and how to think about the forward looking estimates. i.e. the exact opposite of LTCM. they looked back and said "well, XYZ hasn't happened before, therefore, i'll ignore the possibility of it happeneing in the future"

so basically, it is a seller's market in some ways. hedge funds offer a way for investors to hit return targets. it is upon the shoulders of investors to make sure that those return targets are not ill-gotten. (on a side note, that is a separate issue: that investors think in return targets rather than risk budgets).

Barron

[WhoIam]

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there are instances of athletes retiring at the peak of their success (although few, granted).

[/ QUOTE ] An athlete in his prime knows he'll soon have to retire because of the effects of aging on his body (golf is sort of an exception with the senior tour), but this necessary retirement doesn't exist in business. Kerkorian is still going at what, 89?

[Im_Your_ATM]

What is the background (educational for example) of these guys?

Index Funds/ETFs > Mutual Funds as investments for us still right? Even if the mutual fund is run by some superstar who has proven himself (any girls) over time?

[ozyman]

Tom Wolfe (of Bonfire of the Vanities fame) wrote an article for a new magazine on the industry called Portfolio. The general gist of the article appears to be about how many of these guys are giant aholes.

Tom Wolfe Article

The education background of these guys matters a lot less then where they spent their early careers, basically you want to work at Goldman Sachs.

[bottomset]

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Dale,

" Is there a law that prevents these guys from just taking some kind of coin flip (and possibly lie about it) once they have earned the trust of investors? "

For a lot of guys in this industry, getting lucky on some coin flips and getting people to let you make larger and larger coin flips is a pretty accurate description of the business.

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so its a bunch of flips, but there is 3% rake upfront, and 30% rake if you win the flip, from the investors perspective? sounds like a really bad deal

[DesertCat]

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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".

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Reread ARWDWS. Your question is directly answered in the book.

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I've read it several times. Are you talking about the part where Malkiel admits he doesn't really think the market is that efficient and tries to find inefficient opportunities in places like closed end funds for his own investments?

I think you are talking about coinflipping and that these guys are just lucky. It's easily conceivable that someone who beats the market by 1% per year for 10 years is lucky. It's not so conceivable that a guy who generates 5x the market's return for over 10 years is. Before fees these guys are averaging over 50% per year. That's a humongous return and attributing it to luck alone is silly.

If that's your argument, why don't you calculate the odds of generating those returns through luck alone, given the odds of doing 50% in a single year are already fairly small.

edit: removed inflammatory descriptor.

[NajdorfDefense]

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Very few of these guys have track records that can be attributed to much more than variance, even if they are really good and really smart.

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This is fairly offbase.
How long has Richard Perry been around? James Simons ...20+ years.
I know someone who gave Simons $2mm...it's over $100mm now. TBPickens and Icahn have been doing this for several decades. Tudor Jones has been doing this for 25+ years. Caxton's fund is 25 years old. Druckenmiller's been around forever. Bacon's fund is 20+ years old.

Managers who put up 29% annual returns over a 15-25 year period can hardly have those returns ascribed to luck instead of skill. 1 year? Sure, why not. But not 20.
There are guys out there with only 7 down quarters in 15 years, who beat the market annually to boot. Luck?

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Guy raises ten billion dollars. Loses five or ten billion. Still makes $300m in fees.

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Since this has never happened, this is a poor strawman. Eric Mindich probably had the biggest raise ever for his fund, around $4bn at the time, iirc. He's done mediocre.

Obviously, if you're not happy with the fees, don't pay them. I would never pay 3/30 for a manager, but Simons and Cohen have backed it up with terrific net returns even charging 5/44.
All of these guys are probably the largest investors in their funds [including their family/trusts].

[NajdorfDefense]

fwiw, many of these funds make their portfolio holdings available to their investors on a daily/weekly/monthly basis. If you are big enough, you can have a seperate account at a L/S fund, for example, and see all the trades they do for you every day.
The 'coin flip' metaphors are quite dubious, as you can see from the article, by simply running your fund in a smart way, you can make tons without incurring huge downside risk.

Avoid funds that can use too much leverage, and you will not be subject to 95% of the blowup risk in the market. One of our funds paid extra to get out of Amaranth early due to what they perceived as poor risk controls months before they blew up. I'm still shocked more didn't do the same considering they were putting up +12%, and -10% months, well before the big implosion.

[El Diablo]

ND,

When I wrote "many of these guys" I meant many guys in the hedge fund business, not necessarily many of the specific guys in this top 10 list. The Simons, Druckenmillers, and Cohens of the world are who I'm referring to as the "very few." I know quite a few guys who have managed a few million successfully for a few years then raised much more and had big losses or even blown up for a hundred million or so. I'm sure there are instances of this at higher numbers too. FWIW, everyone I know out here who has had success managing $5-10M for three years has been able to raise $50-100M very easily.

[NajdorfDefense]

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ND,

When I wrote "many of these guys" I meant many guys in the hedge fund business, not necessarily many of the specific guys in this top 10 list. The Simons, Druckenmillers, and Cohens of the world are who I'm referring to as the "very few."

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Aha, got it.

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FWIW, everyone I know out here who has had success managing $5-10M for three years has been able to raise $50-100M very easily.

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Really? I'd say less than 15-20% of those I know with really good 3-yr success stories make the leap to the big leagues. There are actually very few $100mm funds, relatively speaking. Perhaps some of your friends are pulling your leg?

OTOH, if you mean they turned $10m into $35m and raised $15m more, than yeah, absolutely.