position size / account equity - FX trading for a hedge fund

MakkaPakka · Jul 22, 2009

I was chatting to someone yesterday about the differences between (FX) retail trading and trading for a hedge fund.

Retail traders control large positions relative to their account size because their stop losses are close enough that the actual exposure of account equity remains relatively small. Put simply they trade on thin margins with tight stops.

In retail trading brokers routinely offer margin accounts of 10, 20, 50, 100 times deposit.

This is not so easy when trading a 'fund size' account. Can anyone here comment on the position size relative to account size that a hedge fund trader might have available?

MP

Martinghoul · Jul 22, 2009

Hmmmm, I am not sure this is the answer you're looking for, but that's not how fund leverage works. In other words, for a given desk's FX spot trades position size = account size. Position size would be determined by other factors (the desk's VAR budget). Obviously, very much depends on the structure and size of the fund. The exposure of the fund as a whole is defined by various credit lines, prime brokerage agreements, so a given trader's FX spot position would be unlikely to breach those global limits.

Does that make sense?

GammaJammer · Jul 22, 2009

Depending on whether the fund is a seperately managed external mandate or an unconstrained alpha type fund it may or may not have explicit leverage limits as well (regardless of what the banks / PB(s) are prepared to extend). But as Martin correctly points out there are various ways to structure these things.

And similar constraints apply to 'long only' real money accounts, insofar as they may have a forward FX currency overlay portion that could add some de facto leverage either as a direct consequence of asset allocation decisions or, indirectly in more extreme cases as a result of drift. This stuff can be tricky to monitor......

GJ

Martinghoul · Jul 22, 2009

GammaJammer said:
Depending on whether the fund is a seperately managed external mandate or an unconstrained alpha type fund it may or may not have explicit leverage limits as well (regardless of what the banks / PB(s) are prepared to extend). But as Martin correctly points out there are various ways to structure these things.

And similar constraints apply to 'long only' real money accounts, insofar as they may have a forward FX currency overlay portion that could add some de facto leverage either as a direct consequence of asset allocation decisions or, indirectly in more extreme cases as a result of drift. This stuff can be tricky to monitor......

GJ

Yep, and some of those leverage limits can be defined in unpleasant ways, which means they can lead to some very painful outcomes.

Technically Fundamental · Jul 22, 2009

Martinghoul said:
Yep, and some of those leverage limits can be defined in unpleasant ways, which means they can lead to some very painful outcomes.

Continue...

Martinghoul · Jul 22, 2009

Technically Fundamental said:
Continue...

Well, there's really nothing more to be said, to be honest. There were funds last year (I know of only one specifically) that had NAV trigger full liquidation clauses in their agreement with their bank. You can think of it as a "Final Solution"-type leverage limit implementation. The fund in question, btw, did trigger the clause.

MakkaPakka · Jul 26, 2009

Martinghoul said:
Hmmmm, I am not sure this is the answer you're looking for, but that's not how fund leverage works. In other words, for a given desk's FX spot trades position size = account size. Position size would be determined by other factors (the desk's VAR budget). Obviously, very much depends on the structure and size of the fund. The exposure of the fund as a whole is defined by various credit lines, prime brokerage agreements, so a given trader's FX spot position would be unlikely to breach those global limits.

Does that make sense?

Thanks for this Martin,

Yes, this kind of detail on the operational arrangements of professional funds was just the sort of information I was looking for but with one key omission.

If I am trading as a retail trader doing OK and not breaching my self imposed risk limits but I AM trading with gross position equity X times my account size. Can I conclude that if I did manage to swing a job in a hedge fund my reported performance would be 1/X times current?

cheers,

MP

position size / account equity - FX trading for a hedge fund

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