Active mangers are paid a management fee regardless of fund performance. The fee is tied to AUM (assets managed). Thus, large funds can make a ton of personal money even if they have horrific returns. This seems ridiculous to me. Managers can theoretically try to target "okay returns" to milk this management fee (i.e., take off risk once they made a certain amount in any given year).

Taxes were never a consideration in any of our team's trading (the firm would handle this...our goal was to maximize profits). The only way I can minimize taxes personally is by limiting my short term-trading. Issue is that I really like to trade, so not sure how successful I'll be at doing this.

When I say less risk, I meant from the standpoint of "all of my money will be invested in my own fund". Hedge fund clients (institutions) have the benefit of being able to diversify in hundreds of funds...I don't have that benefit.

If you were to set up a new fund that better or properly aligned management incentives, how would it be structured?

Do you plan on using any outside managers with your personal account or just do all on your own?

Since you focus on commodity stocks, do you feel there is more alpha to be made in the stock market or an equal amount of edge just trading commodity futures? Have you looked into trading commodity spreads?

How much does the physical market affect your trading? What are some of the larger factors you look out for?

I work as a trader/PM for a CTA in Chicago that has a focus on price action/levels along with a fair amount of discretion based on fundamentals. I launched my own fund internally and had good results for a year and a half but due my investor closing down their firm, I'm back to only working on the main fund. I've struggled to find new investors given the environment in this particular space and everyone needs at least a 3 year track record. I've considered jumping ship and finding another firm , but my boss knows every firm on the street in the Midwest and I have no desire to leave Chicago. Do you have any recommendations on how to approach the situation? I know I'm underpaid but also liked the flexibility of growing internally if I can get new investors on board.

I answered this earlier: I think the better way to align incentives is by having a minimal management fee (something that only covers the cost of research) and a performance fee that is retroactive. What do I mean by this? Let's say you make 10% one year but lose 20% the next (such that you're down over a 2-yr period). Typical HF managers would get paid a significant amount of money year 1, and then would not be able to get paid again until they get back to over break-even (high water mark). Since it's hard making that money back, many of those managers leave to go somewhere else. I personally think that's a joke and that they should not get paid any money over that 2-yr period.

I'm going to invest on my own. It's hard for me to trust someone else given a lot of the obvious mistakes I saw certain PMs make during my career.

I can't give you a great answer here since I primarily traded stocks. We would trade commodities from time to time, but only on a very opportunistic basis. One thing I can say is that I saw a lot of funds trying to short commodities against stocks (and vice versa), and it normally led to disastrous results. They're just too different and the timing is normally off. There is alpha to be made in both markets and I can't say which is better...sometimes for whatever reason, stocks were just a better risk-reward play on a specific theme vs. the commodities that were impacting them. As an example, I think the biggest commodity trade right now is surrounding IMO 2020. Fuel cracks are reflecting a lot of this, but certain stocks (primarily refiners) are not for whatever reason.

Is it a possibility for you to just be up front with your boss? If your track record supports it, he should be open to you running a separate book. If not, you're doing a disservice to yourself to not be looking elsewhere. In my experience, prospective funds are always professional and will not let your boss know that you're looking elsewhere. It sounds like you understand the value of being able to grow internally / develop a track record...the majority of funds aren't that great, so that's hard to come by. I would definitely try to be open with your boss if you haven't done so already.

Well he is willing to let me reopen my program but I've just struggled getting any investors. It's in his best interest as he takes half of the profits with our structure. The owner and the 1 sales person are unwilling to market me so I'm stuck as I don't have any other resources of potential investors. Yes, I should try to push him more to at least talk to investors. The issue is he just launched a new fund trading stocks against futures so he wants to utilize them all to focus on his new product.

In general our AUM has been extremely stable but haven't been able to raise investors in years. Our returns for the main program have been solid making 5-15% a year for the past 3 years but we had a couple rough years before that. I feel like I'm stuck but we are one of the largest CTAs in Chicagoland area with 100-200 mil under management. That's the issues with Chicago vs. NY.

Does a program like the CFA offer any value in landing a job like you had?

What are you investing in with your personal funds these days?

How does it feel to be worth over $5M?

What does your research process look like? Think of sourcing, time spend, incorporation of macro, portfolio decision etc.

Where's was your teams edge? What was unique about your teams process?

Opinion on Howard Mark's critique wrt ETFs that they are a de facto momentum bet and that this will actually be benificial for active managers (esp. in non-hyped / "forgotten" industries like yours)?

I think so. Not so much directly, but indirectly via the knowledge it gives you / ability to show the employer you know what you're talking about. I took Level 1 but then stopped after I was already working at a hedge fund.

I mentioned one stock I like in an earlier post (REGI). My portfolio is entirely comprised of stocks and I'm running dollar neutral to reduce market exposure since I'm not positive on the market. I don't really have that much exposure to any particular sector, either.

Money is overrated.

Research process:

1. Reading any piece of sell-side research that impacted our companies / sectors (literally every piece). You have a big edge working at a large fund - we probably had access to ~30 brokers

2. Channel checks - using an expert network to talk to customers, competitors, etc. of a company. As a commodity investor, I didn't get a ton of use out of these personally.

3. Building models and updating them for daily news. Constantly trying to think about the impact on earnings and how the market will react.

I think our edge was staying on top of the market as best as possible. We had a team of 8 at peak and covered every sector as well as the macro. We would trade like animals as information came out to size our positions optimally. We would also be extremely critical of "hedge fund hotel" names and try to be contrarian. What do I mean by this? You'd be surprised at the number of funds that just piggy back on "popular ideas" at any given time. Normally those stocks performed well and then would blow-up on some unforeseen event (and the downside was greater since they were so crowded long). I would say our biggest edge, though, was being good at the macro. It's substantially more important than the micro (I cited my negative oil bet a few years ago - we spotted this by having a view on the macro; a ton of hedge funds are now out of business because they had no view on the commodity and were just taking bottoms-up bets within the sector).

I agree with Mark's view that ETFs are momentum bets. Hard to say if / when it would benefit active managers.

Who are the equity investors that you look up to?

Hey - answered this in an earlier post.

Who are the sucessful equity investors you think are overrated? and why

Thanks for starting this most interesting thread.

The extent of my knowledge regarding the stock market and big time investing is watching "Squawk Box" every morning and reading Fortune magazine, but I have a question ...

Kyle Bass is a Dallas-based hedge fund manager who is (perhaps) most famous for being right about the subprime housing crisis and being one of the few who set himself up nicely to profit once the mander hit the fan. I can't recall the exact timeframe, (maybe it was 6 months or a year ago?), but Mr. Bass was back in the news again. There was quite a bit of discussion and debate on CNBC (and Bloomberg television) about Mr. Bass's latest "prediction" concerning China. If I recall correctly, Mr. Bass went out on a limb - either that or he's extraordinarily prescient - when he stated that he believes China is due to have their own version of a banking crisis. I'm trying to recall this from memory, but I had the impression that Mr. Bass thinks something similar to what happened here in the U.S. during the 2008-2009 timeframe is going to happen over in China, (i.e. that China is on the verge of experiencing their own "debt crisis" which will inevitably result in a banking crisis.) The question (the debate) among the various pundits was whether or not Kyle Bass is "right" again? (I suppose the assumption is that Mr. Bass is betting big that he is right and he's placing his bets accordingly.)

What do you think? Do you agree with Mr. Bass's assessment vis-à-vis China? If China does fall off the economic cliff in a manner similar to what we experienced here ten years ago, how bad will the ripples be for the rest of the world - and especially for the United States?

P.S. Personally, I think Trump is crazy to be threatening a trade war, but that's an opinion that probably belongs over in the "Trump Presidency" thread over in the Economics & Politics forum.

What stock? How do you know it is about to complete a merger?

I'm not that big of a hater. I felt Ackman and Einhorn were overrated in the sense that some of their publicized bets weren't great. Their recent results have been abysmal, however, so I feel like this is becoming more of a mainstream view. Buffett's track record obviously speaks for itself, but I have issue with his disciples that take everything he says as gospel.

I know Bass and I agree with his China view. What he got wrong was timing...he was too early and underestimated the Chinese government's appetite to further stimulate the economy with even more debt (obviously there is a ton of leverage in that system) in front of the 2017 political transition. They did not want any type of economic weakness as this was occurring and stimulated the economy to post-'10 highs to ensure this was the case.

This is one of the factors that keeps me very cautious on the market. It's very difficult pinpointing the timing exactly (and this is why I think running short is not very wise), but at the very least you can reduce your exposure to stocks before the sh*t hits the fan. Also, while China's absolute level of debt is extremely high, what concerns me is the pace in which debt is being accumulated there.

The majority of hedge funds that trade commodity-levered sectors just assume that everything will be okay in China since the economy is firing on all cylinders at the moment. They are too complacent IMHO.

I think Trump is crazy as well. That being said, I think rising rates are the biggest reason why the market has been weak this year as opposed to the trade war banter.

AROC. It was announced, it just needs to be finalized by shareholders.

if i want to keep my individual positions but hedge against a broad market decline, what's the best/cheapest way for a retail investor like myself to be market neutral/0 beta?

Deep In Debt

Mr. bippyskippy:

In reading your various comments and observations in this thread, I pick up a sense of wariness (maybe even foreboding?) concerning the economy in general and equities markets in particular. I wonder if issues raised in this Fortune magazine article

http://fortune.com/2018/03/15/us-nat...rump-tax-cuts/

are factors (or the major factor) triggering your sense of unease?

A quick comment on an unrelated issue ... In an earlier reply you mentioned that one of your hobbies is playing speed chess and how this skill helped to develop your intuition for playing the markets. I played chess as a teenager. As I gradually (slowly) improved my game, my head began swelling far in excess of my actual abilities. My overinflated ego was crushed the first time I played versus a grandmaster in a simultaneous exhibition. I actually believed, going in, that I would make the GM sweat ... Alas, he crushed me on the 12th move. I didn't feel like that again, (i.e. a sense of total shock and disbelief), until years later when I lost my first really big pot at a poker table.

Later in life I became a software developer specializing in relational database technology. Over time I came to realize that the same dynamic applies regardless of your field of study or chosen profession: A small minority of practitioners, (easily less than 10 percent of the total), do 90 percent of the really significant work. Like the GMs at chess, superior talent is a rare commodity.

Just shorting an equal dollar amount of the S&P against it would be the easiest way. A better strategy would be shorting sector ETFs against your positions. As an example, I cited AROC above...it's an oilfield service company so I'm short the OIH index against it.

I do think the growing US budget deficit is a huge issue. Large deficits have historically coincided with periods in which the economy was in a recession / lack of large stimulus / interest rates high. It's the complete opposite today.

The market prices in what's known at a particular point in time...right now economic growth is strong, LEIs are awesome, and companies are posting strong earnings as a result. The market doesn't do a good job of pricing in potential risks. I believe that downside risk is much greater than normal due to the significant amount of debt in the system / fact that there is now minimal room to further stimulate (QE) / interest rates are so low.

I'm not going to be THAT guy who tells you "the market is going to crash and you need to be short everything". I'm simply saying that there are a ton of risks out there that don't make the risk-reward of being long stocks great (IMHO). You buy stocks when there is a ton of fear in the market, not when companies are generating record-high earnings. The economy is cyclical and earnings aren't going to go up forever.

I enjoyed your chess story! GMs are very tough to beat! I know that sounds obvious, but I'm making the comparison to International Masters who are just one step below yet are not even comparable when it comes to talent! Completely agree with your point.

Not even comparable? There are plenty of IMs who are stronger than the weakest GMs. I'm not sure what the median Elo rating difference is between IMs and GMs, but I would expect it's around 100. If that's the case, the IM will draw or win 56% of the time, win 16% of the time.