How To Become A Hedge Fund Manager

Becoming a hedge fund manager certainly has its perks... if you are successful. The King of the Hedgies is currently John Paulson who raked in £1bn for a years work shorting the sub prime markets and others certainly are not poor.

What do 'Hedgies' do and can you do it?

The answer to that question is a yes and no. Just like it is possible for everyone to be a sports star. If you have the right physical capacity, the mental toughness and the commitment you can get to the top of your game, and of course, there is an element of luck in everything.

The first thing to know about hedge funds is what they are. There are many resources on the web that will go into chapter and verse but the simple explanation is that, typically, a hedge fund is a set up as a company, lets call it XYZ Ltd, which is set up in a tax efficient jurisdiction such as the Caymans or BVI, for example.

The company generally has two classes of shares (it can have more) one are mangement shares (so you own the company) and the other shares are investors shares (which carry no voting rights).

This company will have various service providers such as:

Prime brokerage: Prime brokers provide a range of customised services to hedge funds. Current services include handling trade execution, clearing and settlement, providing financing and technology services, risk management and operational support facilities, securities lending, and making introductions to sources of capital.

Fund Administration: Some hedge hedge funds conduct administration internally while others choose to outsource certain functions such as their accounting, investor services, risk analysis or performance measurement functions to third party administrators. Some outsourcers offer independent pricing of a fund’s portfolio of securities.

Custody: Hedge fund assets are generally held with a custodian, including cash in the fund as well as the actual securities. Custodians may also control flow of capital to meet margin calls.

Of course there will also be a manager of the fund. Assuming you are the one looking to set the fund up, that would be you.

This all sounds a little complicated but there are plenty of administrative services that could put this set-up together for you for around $70,000.

The set up, however, is not the problem. Getting money into the fund is.

Lets say you have a fund set up, you have even managed to get yourself a fund management company properly licensed, you are ready to go as a newly fledged hedge fund manager.

Problem now is that you have to get money into the fund and this is where your problems start.

The continuing fees from your administrators above are payable on an annual basis so your overhead is there. Covering these overheads will be the fees you get from your fund. Fees are the now notorious '2 & 20' meaning that there is a 2% annual fee and 20% of the profits.

Lets say your overheads are £100,000 per annum, you will need at least £5mn into your fund for the annual fee to cover your overhead.

In anyone's language, that is a large chunk of change. To get this you will need to prove to potential investors that you know what you are doing.

Sarah Butcher, editor of eFinancialCareers.com agrees. "You can't just be someone off the street and set up a hedge fund," she says. "Investors want to put their money with someone who has a track record."

When speaking with investors you need to be able to show them your performance and the strategies you use. Gaining this experience is the key.

Going the traditional route you will either train with an investment bank or directly with a hedge fund company. Investment banks are looking for someone with a good degree, maybe in maths or physics, they want someone who is tough minded, a quick learner and someone who has the capacity to make trading decisions based around sometimes complex structures.

Finding your way directly into hedge funds can be hard, they are notoriously secretive. By far the more tradional route is through working as a trader with an investment bank.

So if you have missed the boat as far as becoming a new boy at an investment house are your dreams of becoming a hegde fund trader over?

Not quite. The thing about managing money is that people are looking for performance. If you can show a track record of performance then people will want to invest money with you. You clearly have to have the capacity for enjoying the stock market, so you probably have been buying and selling stocks but you will need to learn more about other market instrument such as futures etc.

You can do this by opening an account at a reputable trading house and downloading their trading system. HF Markets advertise on our site and are very good. They provide direct trader support from Moneycorp Markets which is essential if you want to learn about how its done.

They will provide you trade ideas and the explanations behind them and they will help you develop your portfolio operating on trades similar to what the hedge funds do. If you immerse yourself in this type of trading, making profits on your own portfolio, then you are creating a track record. If you are successful enough then you may get to the point where you believe you have the capacity to start a fund.

We are not saying it is easy, it most certainly is not, but not being a 20 year old with a first from Oxford does not necessarily limit your potential career as a fund manager. It is a long hard slog to get anyone to believe that you are credible but the rewards are there if you get to that stage.

The billionaire boys have spent years perfecting their art in most cases and now have the ear of huge amounts of money, but don't give up becuase you can't work in an investment bank.. remember 'money follows performance'.

If you are serious about becoming a trader, then the Forex markets are an easy place to start. I say 'easy'.. all trading is tough... but the forex market has so many resources online that it is a great place to start. If you are interested in FX trading then this Forex trading aid is a must...

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Oil And The 'Big Rollover'

We picked up an interesting tid bit at marketwatch.com today:

"SAN FRANCISCO (MarketWatch) -- TrimTabs Investment Research, which tracks asset flows into exchange-traded and other funds, said Thursday oil speculation risked tipping the world economy into financial ruin. TrimTabs backed up its hand-wringing by noting the potential impact of these funds in the futures markets: this year, commodity trading advisors and commodity ETF's have received $2 billion a month.

If just half those monthly assets bought oil futures, these would present long positions in 100,000 contracts a month, or about 3% of the open interest in oil futures. "The U.S. is going broke, and the rest of the world is sure to follow," said TrimTabs CEO Charles Biderman. To bring down oil prices, he recommended more disclosure of large oil futures holders. And he suggested oil users and the U.S. government short oil".

That is pretty strong language and fairly kooky suggestions. Short Oil? That would be a brave move but I guess if you want to reduce the price that is one way of going about it...suicidal...but one way. Can you imagine the scenario shoud a sovereign state intervene and try and force the markets to short? It would be like shooting ducks in a barrel as oil traders the world over piled in knowing that, at some stage, government bodies could not longer hold back the tide of millions of speculators. Couldn't happen? Remember Sterling and the ERM and Soros wandering into the sunset with billions of pounds in his pocket? Happy days..

It is far more likley, in our opinion, that some sort of regulatory situation will make speculating more difficult or uneconomical but would that be fair?

You could argue that oil is so important to the world's economy that speculation should not be allowed but how, therfore, would it be priced? You risk the possibility of the price of oil being set by governments and vested interests.. would that be a better situation? I am not so sure about that. We already have OPEC who, at the stroke of a pen could stick a few more million barrels of oil a month into the system and have speculators running for their own short positions in droves.

The real question is; What should be the price of oil? It is a finite commodity so as it become more scarce the price should naturally go up, but are we are that point yet?

I came across an interesting article written in 2000 where the author speculated that we were due for a 'big roll over'. Not actually a point where we would run out of oil, but where demand outsripped supply. Spookily the following chart has proved to be prophetic.

The chart is based around a paper and writings in 1999 by retired Professor of Geology at the University of Oregon, Dr. Walter Youngquist and Dr. R.C Duncan who set out to look at where oil production would be outstripped by demand their various statistics are most vividly presented in the charts above and below.

It is not only oil that is the target of these guys. If you would like to fry your brain have a look at their theory on food and the agri-business...

I wish these guys were on my prop desk.....

Source: http://www.hf-markets.com/

Algorithmic Trading Systems - Trouble ahead?

UBS Bank continues to develop in the algorithmic trading market (and also continues the tradition of being rubbish at naming funds) with the launch of the UBS Commodities Portfolio Algorithmic Strategy System (Comm-PASS). The system is a portfolio based algorithmic strategy developed to benefit from momentum movement in long and short commodity positions on an auto trade basis.

The portfolio is based in five sectors; energy, base metals, precious metals, agriculture and livestock and is a basket of strategies from nineteen commodity futures markets.

'As familiarity with the commodities asset class grows, an increasing number of investors are recognising the value of taking a more active approach with their investment strategy,' says UBS's global head of commodities Peter Ghavami.

'UBS Comm-PASS is the first of a new generation of portfolio-based algorithmic strategy products for the commodities asset class which allows for the generation of returns in both bull and bear markets.'

The individual strategies generate long or short signals in the individual commodity, which takes into account both the trend and the counter trend of specific commodities in combination with the asymmetric return distribution seen in the commodity markets.

'For the last few years, commodity price volatility has been substantially greater than other asset classes, largely due to supply concerns as well as changes in global consumption and the influx of financial commodity investments,' says James Paget, co-head of structured commodity sales for Europe, the Middle East and Africa.

'High volatility offers trading opportunities provided an appropriate trading strategy is implemented. We believe Comm-PASS offers investors the opportunity to generate high returns by exploiting commodity market characteristics.'

With algorithmic trading systems reportedly getting a battering over the last few weeks ,this is a brave time to be selling such a system of trading to clients, but if anyone knows what they are doing, in our opinion, it is UBS.

I am sure we will start to see more and more use of algorithmic trading systems, however, is there a danger in this? Essentially algorithmic trading systems were developed to be able to execute large volumes of trades by splitting these trades up into smaller lots and programmed to create any mathematical outcome that the trader wants. The trading patterns can, of course be customised for example trading more at the close, when volume is higher, and less at lunchtime when its not. The thing is, are these trading patterns predictable?

Some critics say that when less experienced hedge- or mutual-fund traders use the software they've bought from Wall Street, they inadvertently expose their trades. How? Canny traders, mainly those who trade on behalf of big banks and brokerages with the firms' capital, may be able to identify patterns of algorithms as they get executed. "Algorithms can be very predictable," says Steve Brain, head of algorithmic trading at Instinet (INGP ), the New York City-based institutional broker.

Most Wall street firms will go to their deaths saying that there are no leaks in information about their trading strategies and argue that such leaks would kill their business because advantage would be lost and this argument makes sense.

With the algorithmic trading systems becoming more prevalent, will this affect the market itself? Take the human element out of trading and you have, in our opinion, lost some of the magic of the market, levelling out volatility and therefore opportunity. Ever played Chess against a computer? There is always the feeling that it knows what you are doing before you do it and it makes the competition element (and the fun) go out of the game.

And how long will it be before someone at MIT comes up with a computer trading system that analyses trades in a specific market and identifies the algorithms of the big trading houses and thus creates its own predictive trading systems? Paranoid, me? Who said that?

Of course there is a human cost to this also. If computer systems are more prevalent, why would you need a trading floor that you have to pay millions in bonuses to? Best to spend $5mn on a computer trading system that trades day and night, does not take holidays and does not want to go and work for another bank when you don't pay it enough.

The scariest thing for me, however, is the very thought of more and more systems coming into play and the market being worse for it. Sure, things would poottle along a with a little more stability, we probably wouldn't see the wild swings we do on the exchanges and we could all rest safe in the knowledge that our money is being managed by highly sophisticated computer systems rather than the banks twenty year old Ferrari driving, hung over maniac with a machismo complex. But would it be as much fun?

I don't know about you, but when I decided to get into this business, when I was a boy, it was the very fact that what we do is exciting, stimulating and a test of man against the market. Playing the computer at Poker is fun when you are practising, but its just playing the odds programmed into it. I am sure we all prefer it when we scoop up a few hundred dollars having just convinced other players that our pair of two's was a Royal Flush.

Algorithmic trading is great, we love it, but we just hope that its not the beginning of the end of the traditional trading floor being replaced by teenage 'Googlers' sitting on bean bags and playing Foosball while creating ever more clever computer trading programmes which just make the market....well... predictable and boring....