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Proprietary trading

Proprietary trading with bank capital is very different to a hedge fund. Recently there have been several multibillion dollar startups by rookies. Good traders maybe, terrific "returns" cited by previous employers with prime brokerage operations eyeing future commissions. Investors are better served if rookies first learnt the business running much smaller amounts as ALL good hedge fund managers did. Avoid firms that raise more than $1 billion "day-one" money. It will take the manager many years to build the necessary experience, if ever.

In the news is a newbie that somehow raised $3 billion by "never having a losing year" at a bank. My due diligence found his past performance was ENTIRELY due to being at that bank, I suspect that now he is on the outside with no edge, he will lose most of it. Another "star trader" apparently produced $700 million "profits" at a bulge bracket firm. My research found he was using $10 billion of bank capital so that is a pathetic 7% from deal flow and client information he won't have access to. Deduct 2% and 20% and apply realistic external commission and leverage costs and there is not much left. My clients won't be touching that one. But the usual clueless funds of funds are piling in!

Bank traders often claim to be "pure" proprietary but usually have access to flow data they would not see at a hedge fund. They often have first refusal on taking the other side of large customer trades, stock borrow locates and distressed asset sales. Stealing ideas, arbitrages and front-running orders never happens? What "commissions" and stock loan fees were they charged while at the bank? Same as an outside client? Leverage is basically an unknown as trades are backed by the balance sheet NOT investor cash. Percentage returns can't be calculated; at best just the profits generated, a number which the trader AND former bank have a vested interest in making look "high".

Often the performance adjusted for return on CAPITAL is surprisingly poor. A seasoned trader with a good street reputation leaving to set up their own hedge fund will lose many advantages and be cut off from information channels that were often crucial to their PAST track record. Let them learn to run a hedge fund on their cash NOT yours. There will be plenty of time to get in later in the unlikely event the fund turns out to be good. If they threaten to "close" to new investors it is even better since you can ignore them and focus on superior hedge funds that are open and run by BETTER hedge fund managers.

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