Historical Trading Strategy Performance

[shineshaX]

Please advise

Is there a way of knowing whether the histroical performace of a prop trader is actually any good? (please do not reply if you are going to say, "he made money", this is not what i am looking for)

e.g. A long/Short prop trader makes $10m in 2005 and the same in 2006. How does one know that that this return wasn't based on pure luck? i.e. there were so many opportunities to make money that a gorilla throwing darts at the wall street journal would have achieved the same.

Essentially what i am looking for is benchmarks for

Long/short trading
Macro trading -(not my distinction)
Risk Arb

What's the minimum that should have been achieved if one had x amount of capital to devote to one trading style over 2004, 2005, 2006?

Thanks

 

[andycan]

Is there a way of knowing whether the historical performance of a prop trader is actually any good? (please do not reply if you are going to say, "he made money", this is not what i am looking for)

not so much he made money as how he made it and for how long

e.g. A long/Short prop trader makes $10m in 2005 and the same in 2006. How does one know that that this return wasn't based on pure luck? i.e. there were so many opportunities to make money that a gorilla throwing darts at the wall street journal would have achieved the same.

now you are getting into a touchy subject
a famous trader years ago entered a competition and won the 1million dollar
prize his trades where superb to say the least during the competition. what no one knew was that he had 2 accounts the good trades went to the profitable account and the bad trades went to the dumping account get the picture!
but to answer your question though success in the past in NEVER a guarantee for success in the future but a company that has performed well for many years is due to skilled management and a little luck as opposed to the other way round

Essentially what i am looking for is benchmarks for

Long/short trading
Macro trading -(not my distinction)
Risk Arb
you are over complicating matters
what you want to know is what is the person(s) risk reward ratio ie how much is he risking to make x
What's the minimum that should have been achieved if one had x amount of capital to devote to one trading style over 2004, 2005, 2006?

well there you have to take an industry average if he/she is making more then the average its good if he is making less then not so good

 

[rog1111]

I'm not sure about prop traders, but most hedge funds would be very happy with 20% ROI per annum over several years, if achieved in a fairly steady safe fashion, with a max drawdown of less than 5%

rog1111

 

[shineshaX]

I'm not sure about prop traders, but most hedge funds would be very happy with 20% ROI per annum over several years, if achieved in a fairly steady safe fashion, with a max drawdown of less than 5%

rog1111

What do you mean ROI? I understand Return on Investment....but in a bank....it costs 800-900k (excluding salary) to have a prop trader sitting there.
What if you have a Macro approach with 500,000,000 in assets and 6 people sharing the book?
How much should you have made to say that you were successful and above industry average...or even the average bloke on the street......does any data exist?

 

[andycan]

cool did not know that of hedge funds so they look for a 4:1 ratio as a min

 

[rog1111]

Im not sure about that, but can tell you that if a hedge fund makes 20% for it's clients before deduction of management fees etc then that would be considered good.

What do you mean ROI? I understand Return on Investment....but in a bank....it costs 800-900k (excluding salary) to have a prop trader sitting there.
What if you have a Macro approach with 500,000,000 in assets and 6 people sharing the book?
How much should you have made to say that you were successful and above industry average...or even the average bloke on the street......does any data exist?

 

[rog1111]

Im not sure that its really a ratio consideration, but 5% is an accepted conservative maximum monthly drawdown for many investors. The more return the better, but too high can be perceived as "risky", although different amounts of leverage are offered which may scale things up or down.

rog1111

cool did not know that of hedge funds so they look for a 4:1 ratio as a min

 

[andycan]

just was wondering out of curiosity not really important

 

[vergis92]

Please advise

Is there a way of knowing whether the histroical performace of a prop trader is actually any good? (please do not reply if you are going to say, "he made money", this is not what i am looking for)

e.g. A long/Short prop trader makes $10m in 2005 and the same in 2006. How does one know that that this return wasn't based on pure luck? i.e. there were so many opportunities to make money that a gorilla throwing darts at the wall street journal would have achieved the same.

Essentially what i am looking for is benchmarks for

Long/short trading
Macro trading -(not my distinction)
Risk Arb

What's the minimum that should have been achieved if one had x amount of capital to devote to one trading style over 2004, 2005, 2006?

Thanks

You have to consider trading style and market characteristics,
One important factor for example is market liquidity (availability of buyers and sellers
so that you have good fills)

one can make 10% a month trading the SP500 but once you are beyond £100K a year
you will have bad fills, nervous behaviour and more risk, most likely you won't be able
to keep that 10% a month

when trading currencies you don't have a problem with liquidity and fills, any profit potential
there can continue to very large figures.


you may buy £1,000 a stock , it goes up 20% you make money OK , you sell and you
manage to sell at a very high price near the top,

had you bought £1million of the same stock and made 20% and wanting once again
to sell all at once at that price, chance are you would have shortage of buyers, and you would
have to start selling in stages while making discount offers,
sometimes you make extreme offers and people still don't buy, your broker gives
you a bad fill in the end, so what appeared to be 20% ends up being much less.
in certain small markets there's such shortage of buyers when a steep decline occurs
that you are practically trapped!!

stock markets are not different to other forms of trading