How much to risk per trade? Returns and drawdowns.
Between 1990 and June 2000 the median hedge fund (there are not that many that started in 1990) had an annual return of 16.3% and max drawdown of 28.5% according to MORGAN STANLEY. Keep in mind the 2/20 destroys profits. (16.3%*1.25)+2% = 22.4%, and 28.5-2 = 26.5%.
So what the median fund actually did I I did not mess it up was get 22.4% return a year and a max drawdown of 26.5%.
Of course that drawdown is the worst over a 10 year period.
The S&P 500 has an annual return of 17.2% and max drawdown of 15.4%.
What is interesting is to look at the details, for example the few specialist credit between 90 and 00.
The smallest return one had this to show: 11.5% annual, -4.9% max down.
The biggest return one had this to show: 17.4% annual, -19.4% max down.
More returns but with much more drawdown.
Here is the paper:
morganstanley.com/institutional/qs/pdfs/msdw0011_why_hedge_funds.pdf
A portfolio of hedge funds, since they're not all completely correlated, would do much better than the S&P500 in particular on the drawdown side.
Renaissance says their medaillon fund uses an average of 12.5 leverage and takes 8000 trades at the same time 4000 short & 4000 long to reduce risk even more.
If this is true it means going in each position with 0,15% of their account. Not sure how far their stop is but has to be less than 10% of a share price, this means a risk of 0.015% per trade at most, now since there are 8000 at the same time it would be 8000 times more than this, but since there are shorts and longs it sorts of evens out and who know what their real risk is? All we know is it is very small that's for sure.
But leverage costs money, and what RenTec did was since their risk was so small and they do a ton of volume, they partnered with banks that offer them extremely cheap leverage.
And then they averaged 66% a year in the past 30 years, with a fund capped at 10 billion.
The secret is diversification, it reduces dramatically risk which allows for better returns.
But we have to come up with this diversification, not easy to find another good place to invest in, another good uncorrelated strategy.
And when we find those additional sources, we are not RenTec we have to pay a big price for leverage so we cannot just scale it hard.
Certain "strategies" will help reduce risk but they also cap returns much and leverage is not free so it might not be worth it depending on the person.
I just want to take a look at a few non-managed "low fee" "safe" no brain funds. Examples for the 10-year period ending January 31, 2017:
Vanguard LifeStrategy Growth Fund (MUTF:VASGX) has a Maximum Drawdown of 47.6% and annual return of 4.7%.
UBS Global Allocation Fund (MUTF:BPGLX) has a Maximum Drawdown of 48.7% and annual return of 2.6%. This fund has the rather unappetizing combination of low return and a large Maximum Drawdown.
LoL this is so bad. And all the grandpas are loving it, they think they found the holy grail and pat each other on the back. Add to this the fact that most people withdraw at the worse time...
Over the same 10 years period the S&P500, returned an annualized 7.024% dividends reinvested (4.8% otherwise) with a max drawdown of 57.8%
From 2000 to 2020 (september) it had annualized returns of 6.23%.
From 1871 to 2019 it returned about 9% (dividend reinvested) - 6.8% if we adjust for inflation, with a max drawdown of Adolf Hitler & Auschwitz the ultimate price.
So we're about in the average with 6%. Growth is slowing down (demographics, tech limits, earth limits...) so we will probably average less than 6% in the future.
From 2007 to 2017 the top strategic DIY portfolio recipes had returns of ~typically 11% with max drawdowns of also about 11%.
Ray Dalio pure alpha 2 has returned 11.5% / yr in the last 20 years and max drawdown I'm not sure I think it was 8% recently and much less before that.
Those numbers are hard to find seriously... But well we get an idea of how far it can get pushed.
An article from 2017: "Investors earned an average of 4.67% on mutual funds over the last 20 years (Source: creditdonkey.com/average-mutual-fund-return.html)" of course there is no mention of drawdown because who cares am I right? Mutual funds are not for the best & brightest of investors.
Big risk is not a magic trick. "Big risk" does not mean "big return but with big risk". It means NO returns. It means losing with a winning strategy 😂.
So what the median fund actually did I I did not mess it up was get 22.4% return a year and a max drawdown of 26.5%.
Of course that drawdown is the worst over a 10 year period.
The S&P 500 has an annual return of 17.2% and max drawdown of 15.4%.
What is interesting is to look at the details, for example the few specialist credit between 90 and 00.
The smallest return one had this to show: 11.5% annual, -4.9% max down.
The biggest return one had this to show: 17.4% annual, -19.4% max down.
More returns but with much more drawdown.
Here is the paper:
morganstanley.com/institutional/qs/pdfs/msdw0011_why_hedge_funds.pdf
A portfolio of hedge funds, since they're not all completely correlated, would do much better than the S&P500 in particular on the drawdown side.
Renaissance says their medaillon fund uses an average of 12.5 leverage and takes 8000 trades at the same time 4000 short & 4000 long to reduce risk even more.
If this is true it means going in each position with 0,15% of their account. Not sure how far their stop is but has to be less than 10% of a share price, this means a risk of 0.015% per trade at most, now since there are 8000 at the same time it would be 8000 times more than this, but since there are shorts and longs it sorts of evens out and who know what their real risk is? All we know is it is very small that's for sure.
But leverage costs money, and what RenTec did was since their risk was so small and they do a ton of volume, they partnered with banks that offer them extremely cheap leverage.
And then they averaged 66% a year in the past 30 years, with a fund capped at 10 billion.
The secret is diversification, it reduces dramatically risk which allows for better returns.
But we have to come up with this diversification, not easy to find another good place to invest in, another good uncorrelated strategy.
And when we find those additional sources, we are not RenTec we have to pay a big price for leverage so we cannot just scale it hard.
Certain "strategies" will help reduce risk but they also cap returns much and leverage is not free so it might not be worth it depending on the person.
I just want to take a look at a few non-managed "low fee" "safe" no brain funds. Examples for the 10-year period ending January 31, 2017:
Vanguard LifeStrategy Growth Fund (MUTF:VASGX) has a Maximum Drawdown of 47.6% and annual return of 4.7%.
UBS Global Allocation Fund (MUTF:BPGLX) has a Maximum Drawdown of 48.7% and annual return of 2.6%. This fund has the rather unappetizing combination of low return and a large Maximum Drawdown.
LoL this is so bad. And all the grandpas are loving it, they think they found the holy grail and pat each other on the back. Add to this the fact that most people withdraw at the worse time...
Over the same 10 years period the S&P500, returned an annualized 7.024% dividends reinvested (4.8% otherwise) with a max drawdown of 57.8%
From 2000 to 2020 (september) it had annualized returns of 6.23%.
From 1871 to 2019 it returned about 9% (dividend reinvested) - 6.8% if we adjust for inflation, with a max drawdown of Adolf Hitler & Auschwitz the ultimate price.
So we're about in the average with 6%. Growth is slowing down (demographics, tech limits, earth limits...) so we will probably average less than 6% in the future.
From 2007 to 2017 the top strategic DIY portfolio recipes had returns of ~typically 11% with max drawdowns of also about 11%.
Ray Dalio pure alpha 2 has returned 11.5% / yr in the last 20 years and max drawdown I'm not sure I think it was 8% recently and much less before that.
Those numbers are hard to find seriously... But well we get an idea of how far it can get pushed.
An article from 2017: "Investors earned an average of 4.67% on mutual funds over the last 20 years (Source: creditdonkey.com/average-mutual-fund-return.html)" of course there is no mention of drawdown because who cares am I right? Mutual funds are not for the best & brightest of investors.
Big risk is not a magic trick. "Big risk" does not mean "big return but with big risk". It means NO returns. It means losing with a winning strategy 😂.
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