1) How much capital do I need?
Not hundreds of millions or billions. "Just" USD5 to 10 million. Not as much as I initially thought. Though not many people have that amount indeed. I once worked for a hedge fund that started off with only USD2 million AUM. Got paid peanuts. Yar the pay is low. My friend earns US$1300 a month. It's the bonus that is makes him comfortable.
2) What trading strategies should I have?
Try to have a bread and butter trade. The company survived trading only ONE or TWO contracts at the beginning. BUT they are damn good at arbitraging it. This is the biggest issue. The point is to have such a reliable strategy and be so good in it that I know I can survive on my own with my puny little capital. I don't have the hundreds of millions that the big boys have and can play with. Think about how much capital Nick Lesson had playing with Baring's account until it went bankrupt.
3) How do I get in?
He can make a recommendation, but its still up to the boss. The boss looks out for people who are team players, not egoistic, not stubborn, not emotional. Basically, some one who is not too greedy, able to execute trades systematically and loyal to the team. Apparently, they execute trades together. Trader A buys in one market and Trader B sells in another market for example. The last thing he wants is some one who trades for several months, learns about the strategy and quits to join another firm.
This is totally different from what I hear at other firms. Other places will hire in the buckets and only accept the profitable traders after a few months. This guy takes a different approach. He monitors the strategies used and does not let his traders become cowboys fighting for themselves.
4) What's the difference between a proprietary trading house and a hedge fund?
The key learning point was that prop shops and hedge funds have very different business models. Prop shops are more like factories and the traders are like the floor workers, I heard. The traders work hard at exploiting the same opportunities day in day out and literally pick the nickels. Apparently the boss of this company liked trades that are profitable, consistent and can be repeated frequently.
On the other hand, the hedge fund that I used to work for would hold its positions over longer periods of time and is willing to accept losses for several months. To the prop shop that I spoke about, this is almost unacceptable. Suppose you have a stable strategy that makes $5000 a day on $10 million of capital. You would easily make $1 million in a year. For a hedge fund to make the same amount from management fees, it will need to have $100 million a year in assets under management, quite a challenge if you are not well connected. Thus a hedge fund has the added challenge of creating and maintaining a client base.
A reader asked me more of the differences between prop shops and hedge funds. I pointed out that they will have different risk reward profiles and investment capacities. Read more about this in under Resolved Requests.
NOTE: I am not saying what a prop shop or a hedge fund should be like, but am merely sharing our experiences and observations
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The objective of Finance4Traders is to help traders get started by bringing them unbiased research and ideas. Since late 2005, I have been developing trading strategies on a personal basis. Not all of these models are suitable for me, but other investors or traders might find them useful. After all, people have different investment/trading goals and habits. Thus, Finance4Traders becomes a convenient platform to disseminate my work...(Read more about Finance4Traders)
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