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The interesting factor here is strategy sizing. The 100 experts need to manage portfolios of a certain size. The amateurs don't. There are people who can carve

The interesting factor here is strategy sizing. The 100 experts need to manage portfolios of a certain size. The amateurs don't. There are people who can carve out a living of a strategy that has sustainable alpha but would not be attractive to hedge funds due to the capacity of the strategy.

Ameo 10y ago
This is absolutely true. Many, many strategies that are viable at small portfolio sizes fall off very quickly when millions, tens of millions of dollars start to be used for them. Although the world's financial markets are massive, the little inefficiencies that can be exploited for profit often aren't.
- roel_v 10y ago
  "This is absolutely true. Many, many strategies that are viable at small portfolio sizes fall off very quickly when millions, tens of millions of dollars start to be used for them." I've thought this for nearly a decade now, yet have never seen or thought of such a thing. Of course I'm just an idiot so the fact that I didn't think of any means nothing; but you'd think that in all that time looking for it, someone somewhere would have described such a thing, even if only to make money on 'how to find small-portfolio investment strategies' ebooks and seminars. So I'm curious what makes you say 'absolutely true' rather than 'I think so too'.
  - dzdt 10y ago
    Dude, in the context of an internet post "this is absolutely true" MEANS "I think so too."
    - roel_v 10y ago
      Sure, it was just a roundabout way of saying 'please elaborate' while trying to keep the tone non-combative.
  - sseveran 10y ago
    Well to start with people running small capacity strategies tend to be just as secretive as running a large capacity strategy. Strategy capacity is something that professionals talk about and doesn't get as much play when talking to a retail audience. As for the approach, its not any different than finding a high capacity strategy. It requires some piece of information or insight that other market participants don't have. Consider a scalping strategy that trades a few different futures contracts. If on average we trade 200 times per day with an expected profit of $5 per trade with are making $5,000 per week with our strategy. If we say we spend $5,000 per month on the tech to run our business (a risk system, market data, compute time, etc...) we are making $15,000 of profit each month. If we are a large hedge fund or prop operation the $15,000 per month (assuming the same costs) may or may not be worth running. As a trader say I am making $250K base plus some percentage of my P&L I would definitely need to be running more than that strategy to justify my job. Depending on how much attention it requires it might not be worth the company running it. If I have two other strategies that each make $100,000 per month for the business am I better of in investing in those strategies or one that makes a lot less money? The answer could be yes (like maybe I could add a hundred more instruments to trade) but just like any other business the investment will be evaluated versus the expected returns of my other options.
    - roel_v 10y ago
      I understand the last paragraph, my question is more: what makes strategies not scale. Should you go looking in very niche sectors, where the transaction volume limits the scalability? Or are there particular classes of market insights that by their nature only allow (relatively) small profits? Or are there areas where one can exploit particular technical skills? Or maybe focus on geographically small areas somehow, which by their nature limit the potential profit and thus might keep out big players? I'm not a trader and the level of my questions probably shows that; still despite my (amateur) research for years, I haven't found evidence of people successfully deploying such strategies. And while particular strategies of big players are secret, there is a lot of information on the general principles; for small setups, nothing (afaik). So that leads me more and more to the conclusion that it's simply not viable. Looking at it another way: a trader who got his experience in a big fund, and who goes solo (a documented scenario), do they go after such inherently small markets, or do they do the same they'd do at a big fund only with less money or with less sophistication? In other words, if they'd have more money, could they scale up or not?

Ameo 10y ago

This is absolutely true. Many, many strategies that are viable at small portfolio sizes fall off very quickly when millions, tens of millions of dollars start to be used for them. Although the world's financial markets are massive, the little inefficiencies that can be exploited for profit often aren't.

roel_v 10y ago
"This is absolutely true. Many, many strategies that are viable at small portfolio sizes fall off very quickly when millions, tens of millions of dollars start to be used for them." I've thought this for nearly a decade now, yet have never seen or thought of such a thing. Of course I'm just an idiot so the fact that I didn't think of any means nothing; but you'd think that in all that time looking for it, someone somewhere would have described such a thing, even if only to make money on 'how to find small-portfolio investment strategies' ebooks and seminars. So I'm curious what makes you say 'absolutely true' rather than 'I think so too'.
- dzdt 10y ago
  Dude, in the context of an internet post "this is absolutely true" MEANS "I think so too."
  - roel_v 10y ago
    Sure, it was just a roundabout way of saying 'please elaborate' while trying to keep the tone non-combative.
- sseveran 10y ago
  Well to start with people running small capacity strategies tend to be just as secretive as running a large capacity strategy. Strategy capacity is something that professionals talk about and doesn't get as much play when talking to a retail audience. As for the approach, its not any different than finding a high capacity strategy. It requires some piece of information or insight that other market participants don't have. Consider a scalping strategy that trades a few different futures contracts. If on average we trade 200 times per day with an expected profit of $5 per trade with are making $5,000 per week with our strategy. If we say we spend $5,000 per month on the tech to run our business (a risk system, market data, compute time, etc...) we are making $15,000 of profit each month. If we are a large hedge fund or prop operation the $15,000 per month (assuming the same costs) may or may not be worth running. As a trader say I am making $250K base plus some percentage of my P&L I would definitely need to be running more than that strategy to justify my job. Depending on how much attention it requires it might not be worth the company running it. If I have two other strategies that each make $100,000 per month for the business am I better of in investing in those strategies or one that makes a lot less money? The answer could be yes (like maybe I could add a hundred more instruments to trade) but just like any other business the investment will be evaluated versus the expected returns of my other options.
  - roel_v 10y ago
    I understand the last paragraph, my question is more: what makes strategies not scale. Should you go looking in very niche sectors, where the transaction volume limits the scalability? Or are there particular classes of market insights that by their nature only allow (relatively) small profits? Or are there areas where one can exploit particular technical skills? Or maybe focus on geographically small areas somehow, which by their nature limit the potential profit and thus might keep out big players? I'm not a trader and the level of my questions probably shows that; still despite my (amateur) research for years, I haven't found evidence of people successfully deploying such strategies. And while particular strategies of big players are secret, there is a lot of information on the general principles; for small setups, nothing (afaik). So that leads me more and more to the conclusion that it's simply not viable. Looking at it another way: a trader who got his experience in a big fund, and who goes solo (a documented scenario), do they go after such inherently small markets, or do they do the same they'd do at a big fund only with less money or with less sophistication? In other words, if they'd have more money, could they scale up or not?