Hedge Funds as Prop Desks?

Another excellent article from Falkenblog:

“A big hedge fund is known for hiring a lot of traders, giving them each a small amount of capital, and then firing them when they lose, say, 5% of their capital. With this rule, they are basically running a strategy momentum portfolio. I know the fund is very successful, with about 140 traders at any time and getting rid of 25% or more each year. They have several billion dollars under management.”

I started my financial career at a NYC proprietary desk and witnessed the same. It was astounding from someone coming from a Fortune 500 company the amount of turnover on a prop desk. Additionally that business model was one not seen in many other places in business. We used to throw terms out like ”ghost” or thats a “a revolving chair”. People would simply disappear into the night, or in actuallity called into the risk managers office and told not to come in tomorrow. No 2 week notice, just out the door.

But surprisingly most of the famous hedge funds you hear about, Millenium, SAC, Tudor Jones, and numerous others are run in a very similar fashion. Though you hear about how tough it is on Wall Street and how bosses are difficult to deal with, its more likely attributed to some highly educated PhD or MBA never being exposed to that type of model in the first place and having issues. On a prop desk that is business as usual and one usually finds another desk to land on though with lower risk tolerances or additional scrutiny.

The other thing to notice though is the apparent success of these models. Despite a lousy performance the previous year, these hedge funds have managed to put up stellar returns and I imagine will continue to do so in the future. But lets be honest, these guys are running the same model as those bucket shops that advertise on CraigsList.

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~ by largecaptrader on June 18, 2009.

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