Dear Financial Voice Reader,
Last week I saw an interview with hedge fund legend Jim Simons. He described how he went from being an academic to a multi-billionaire hedge fund manager. So how is it that some people solve the problem of the market?
First, you have to identify the problem, as Jim did. He recognised all people in trying to make money from the market are simply buying low and selling high. To do this he reasoned his way to a being a multi-billionaire by realising he therefore has to find trends in prices.
He worked out that a trend could be over seconds, minutes, hours, days, weeks. But he needed some way of knowing the likelihood a trend is about to commence.
He did this by looking at patterns in prices before trends started in the past. This gave him something which worked 7 times out of 10.
But he then needed to work out what to do when he was wrong and the trend didn’t come through? He realised he had to protect his losses in those cases.
So he did this in two ways. First he made sure he found patterns which told him quickly too if a trend wasn’t going to happen once he got into it. That would save time and money in a trade which is losing.
Second he made sure he bet small sizes initially. He would then as the trend went his way add to his position.
All this was simple logical reasoning he did. But how does that get you to billions? And what were the patterns.
Well the patterns can be observed by anyone looking at price charts before trends. But what about making billons from such simple observations?
To trade other people’s money and earn fees from it is a completely different ball game of course and I’m often asked how to start a hedge fund. Well you need a track record with real money, for at least a year. Then you need friends and family backing you and trade their money. Then you go to lawyers and set up a fund and appoint a board, pass resolutions and find and appoint brokers, accountants, auditors, custodians, bankers, compliance officers. Then you go out with your presentation pitch to potential investors.
Live any business you have endless days where you are arguing against objections they may have so you address everything before it can arise. Only then do you know you have a great business model.
What is it investors want? Low volatility, ie consistent returns. But most people can’t win every month. And on a losing month you can’t raise capital. You will also find it difficult with under 12 months track record – actually for some three years track record is too short.
Others will not invest unless you are managing over 1m, some want over 10m.
And when you do the maths you realise that even if you manage 10m, and make say 30 percent return on that ie 3m, and take 20 percent as your fees from that, you get 600k before tax and costs for the huge responsibility of managing 10m. So you quickly think twice and decide it’s better just to manage your own money!
Alpesh Patel
