Anton Kreil Explains What a REAL Hedge Fund Manager Does

what is a professional trader at a hedge fund ooh first and foremost protect the capital of their clients so their investors make money in rising and falling markets the professional traders are known as portfolio managers PMS and their only function is positive selection portfolio positions that they actually want to have there's no market making activity their function is similar to the proprietary trading function but it's a hundred percent of the time the only difference is just the nature of the business they operate in so let's have a look at the differences in the nature of the business so investment banks where does the capital come from to allow an investment bank to operate their public companies they've got public shareholders when you invest in the investment banks stock or their debt if you invest in the investment bank stock you're giving them money to go out and generate business in primary markets and business in secondary markets that's what you're doing you're providing the capital for them to do that what you do with a hedge fund is different if you invest in a hedge fund so what are these guys doing well the clue is in the name hedge funds they're usually hedged they're hedging out risk and they've usually got diverse long short portfolios and really a hedge fund is just simply a business structure if you have a certain type of structure you're a hedge fund so it's just the way the business is structured and this two entities that you really need to focus on for the purposes of today it's the management company and the offshore fund so you have an onshore management company and an offshore fund for management company company typically charges one to two percent to manage the assets under management they're a um and an annual performance fee is charged on the fund on the assets of the fund when they make money but something that most people don't realize is that performance fee doesn't automatically just go out of the fund and everyone gets paid a big bonus and everyone goes home funnily enough the investors want to see the hedge fund manager invested in their own strategy and happy to invest every year so typically what you will see in the Mandate of the fund in the term sheets before an investor invests they'll want to see that the portfolio manager is contracted to reinvest their money all the time into the fund every year so typically they'll be reinvesting at least half of the performance fee back into the fund every year so what does that mean it means they trade their own money banks investment banks traders their trade public shareholders money professional traders that hedge funds trade their own money and outside investors money and charge a performance fee and a management fee to do so now because the hedge fund trader is spending a hundred percent of their time on the put on the positive selection portfolio so there's no market making their trading and investment process is a lot more sophisticated than the guys who are prop traders it investment banks they're much more thorough in what they do this is the structure that you can go through of a typical hedge fund when you get the presentation but for the purposes of today because we've got a bit of limited time just to understand the onshore management company and the offshore fund so let's have a look at an example of a billion dollar hedge fund a hedge fund that's got a billion dollars of assets under management we're looking at this because the billion dollar number is the number in the industry that's considered to be the level at which you've arrived as a hedge fund below that everybody's trying to get to a billion dollars that's the golden number so typically you can start off with fifty to a hundred million dollars these days it's still quite difficult to get but you're aiming to grow in two three four years up to a billion dollars that's when it's people that's when you've considered to have to have arrived what are they actually doing well in this example we're looking at a fairly conservative 1 billion dollar hedge funds holding 25 positions long and 25 positions short in their portfolio so they've got a self-imposed position limit of 2% of assets under management so no single position can be over 20 million dollars and that will actually be in the terms of the fund before the investor invests it's one of the reasons why they're investing and they're targeting a 20% return with mid-teens volatility 15% volatility so it's logic that you would want to get a 20% retargeting a 20% return you would rather invest in somebody who has 15% risk and achieves 20 than somebody who has 40% risk and achieves 20 these numbers will be in the mandate and the term sheet as well of the hedge funds it's the reason why people invest so in this example they're charging investors a 2% management fee just for the record 2% is very high so this hedge funds getting away with charging 2% 1% is the industry standard and they're charging a 20% performance fee so they're making 20 million in management fees and 20% on the performance 200 so making 40 and then 50% of that performance is reinvested by the managers so the beginning of next year the 1 billion dollar funds fund becomes 1.16 billion 40 million is left the fund 20 million in management fees and 20 million in performance fees now let's think about that management and performance structure first of all let's deal with the management company the management company is onshore and invoices the fund offshore for the management fee annually why huh who spoke tax yeah we can come to that in a second that's one reason but what's that 20 million used for yep the 20 million is used for all the infrastructure of the fund to run that fund including basic salaries of everybody in the office I'm glad you brought up tax because we'll move on to the performance fee now where's the performance fee invoiced offshore because the fund sits typically in an offshore tax haven no one likes paying the tax least of all the investors so they invest in the offshore entity and the traders charge the performance on the offshore entity then they don't need to bring it on shore they can reinvest it and keep profits offshore so what does all this mean for you guys the professional traders are investment banks and hedge funds now we understand what they typically do well everybody here pretty much 90% of you at the beginning of the presentation put your hand up as I said you're going to apply to an investment bank for an internship or a graduate position at some point in the next year well first of all you clearly don't understand what you're dealing with because if you did you wouldn't a hund if you've got a degree and you spent fifty thousand pounds on it you need to know what you're dealing with so let's summarize it first hedge fund managers use their own money to trade they reinvest and they're invested in their own fund they also accept outside investors money and they charge to do that traders investment banks don't they trade public shareholders money and they spend 80 to 90 percent of their day managing a commission revenue business and trading out of positions that they don't want to have it's a totally different function the Commission business at investment banks unfortunately has been in structural decline for over a decade it started in 2002 you just shouldn't believe what you read in the media because they have a different agenda they want you to buy the newspapers they want you to watch the television and watch their program to get ratings and they want you to hit their website so they will sensational eyes everything your perception is completely misguided in this market senior professional traders at most investment banks don't get paid more than $300,000 a year that's basic plus bonus junior traders get significantly less and both of them exist month-to-month so we're talking about putting their card in the ATM machine at the end of the month and it says zero or has a negative balance they exist because the senior traders have all got whopping mortgages in Central West North London wherever their kids are in private school they've got expensive lifestyles what goes in goes out it has another consequence for you that you need to understand if there's no opportunities to make money investment banks do good traders go and work it investment banks know they've all left they've all gone to hedge funds they've all left or left the Western world altogether or they're operating in the Western world and doing their own thing and trading their own money because they can make more money doing that than why can get an investment bank what does it mean for you guys it means your expectation of the training that you're going to get when you go to an investment bank is completely misguided because you're going to be learning from the crap I think all the guys that are left over who can't move to hedge funds who don't have the talent who don't make money trading and don't have enough money to trade with their own money that's what's left you're going to be sitting next to them learning how to trade off them and they don't even know how to do it themselves because all they do is stick things in a machine there's also another consequence to this and we call it in the industry the race to zero these algorithms which are so prevalent in the industry and we have a gentleman here Corvin Corbin's a hedge fund manager who's down here to talk to you today about that later we'll go over the basics here the algorithms have destroyed all short-term opportunities in publicly traded assets to make money because that example that we looked at before where the machine is buying on behalf of the client 10 million dollars of Apple at 500 there's machines built to predict what that machine is doing and they buy the Apple before the machine buys it and sells it back to them at high price and those machines built to predict the machine that's predicting the machine that's buying Apple so how many trades do you think the algorithm can do in a second someone throw a number at me couple of thousand it will stay in the thousands they haven't quite built the millions one year so you're looking about fifteen twenty thousand but decent algorithm how many can a human do one but humans literally don't stand the chance this race to zero is everything in a short space of time so we're talking as a second a minute ten minutes an hour a day the human doesn't stand the chance the machines have replaced humans on electronic exchanges in anything under a day you don't stand the chance and if you look at implied volatility of publicly traded assets over the last twelve fifteen years it's just gone like this constantly down over short time horizons and that's what we call the race to zero because all these machines are competing to all the returns to zero over short spaces of time so you either need to become the best programmer in the world if you're going to be successful in trading or you go where the opportunities are and the opportunity now is not to go to the investment bank and make money over one day because volatility is really high those guys stick things in machines the opportunity as a human is to add value by learning how to manage portfolios and trade portfolios over one to three month time horizons longer time horizons because the machines can't do that humans can do it so that's where you add value as a human it also gives you another strong message all the good guys are leaving or have already left and now they're trading either a hedge fund structure with their own money or they're trading in other structures with their own money they're sending you a very strong message you need to trade with your own money if you want to be a professional trader that's what you have to do now you can't go to an investment bank and trade with publicly available shareholder money or public shareholder money and get away with making tens of millions of dollars it's not available anymore it doesn't exist

Channel: InstituteofTrading

Views: 492,587

Keywords: Anton Kreil, Raj Malhotra, Jason McDonald, Chris Cathey, ITPM, Institute of Trading, Goldman Sachs, Trading, Retail Trading, FOREX, Instutrade, Institute of Trading and Portfolio Management, Ben Berggreen, Stock Market, David Perlin, Ross Williams, Anthony Iser, Million Dollar Traders, Hedge Funds, Investment Banks, Training, Coaching, Mentoring, Business, NYSE, NASDAQ, Day Trading, Swing Trading, Hichem Djouhri, Stocks, Commodities, Interview, Wall Street, Finance, Millionaire, Billionaire

Id: YXSwLaXnjGg

Length: 18min 6sec (1086 seconds)

Published: Thu Dec 21 2017

Reddit Comments

[u/ThatChicagoDuder]

As always, I am not a financial advisor and this is not financial advice.

We've been talking about it in other posts about high frequent trade algo's being able to do the ladder attacks and buy and sell the same stock thousands of times a second.

So whenever anyone talks volume = price....it's not always an accurate representation.

Even if 90% of the float is locked up, those high frequency trade algo's can get the volume of trades to be equivalent to the entire float just by sheer speed and magnitude of them running. They're capable of trading the same stock (buying and selling thousands of times a second with the same stock)

The question is, what benefit and value do those algo's give to the markets in terms of: 1) Liquidity 2) Price discovery 3) Overall usefulness to make the markets more resilient?

10 points to the lead paint & crayon eating smooth brained ape that answered nothing to any of the points above! Any changes to order types of oversight that would effect those high frequency trading algo's wouldn't hurt retail whatsoever.....however......it would hurt the people who spent billions to setup the infrastructure to do that. And billions more every year to keep pushing it and finding new ways to manipulate that.

Add in the fact that there have been more than enough cases where those High Frequency Traders and algo's have learned and also been caught purposely blocking trades and flood certain tickers to purposely short it - causing them to get lots of $$$ (think flash crash and ticker tantrums).....it's all garbage. That's why they hate IEX....

For those of you that don't know, the IEX exchange is basically one that doesn't allow for latency arbitrage or HFT to trade before them to drive their price up (think Citadel seeing your order, buying the stock, then selling it to you for a few pennies more). IEX was able to make that happen with a simple $29K spool of wires.

Think about how furious Citadel and these algo creators and firms that specialize in High Frequency Trading have to be that IEX's sole purpose and infrastructure is just extra wires (fiber optic cables really) cut to specific lengths so each exchange receives their price at the same time rather than milliseconds or microseconds before.....$29K of wire completely destroys their billions they spent on infrastructure, as well as billions of dollars of profits from not allowing them to do HFT......

Imma give an honorary shout-out to IEX for being the biggest dong Ape out there next to Harambe! Same with Charles Barkley....and the dude who made Capri Sun....I don't know who he is.....but I appreciate his work.....

Feel free to share this post to anyone who wonders why IEX is the shit or if you want karma! Stay safe and schwifty y'all!

Edit #1: touched up some points to make it read more clear and just stated anyone can repost this for their own karma if they need it.

[u/Zozi-_-]

Read “Flash Boys”

[u/alwayssadbuttruthful]

He talks about how many trades can be traded in one second by an algorithm , @ 15:00, he stztes 15k-20k...The video was uploaded on Dec 21, 2017

That statement makes me question about 1/27/21 , when 1.5B trades occured at the peak of GME's rise , and this happened in seconds...

[u/brillman]

Thanks for the share. Very interesting youtube content.

[u/Shagspeare]

God this guy is so fuckin slimy it’s hard to watch

[u/mr-frog-24]

Smart guy

[u/adeelio]

Hey guys! Me and a few other members are doing a group buy for anton kreils new course ptm 2.0. If you’re interested in taking part please give me a message to be added to the group! The more people we have the cheaper the cost will be !! :)