MATH, ASSET ALLOCATION & “THE HOAX”

Twitter is full of clowns, fakes & posters (“CFP’s”) that some – even well followed & good people (such as a former trader & risk manager from $GS who posts regularly) – get punk’d by. One such CFP example is @HedgeStrategy. We misstepped & Reco’d this account before, however, we correct the mistake – admitted a wrong – and retracted the Reco with an “Unfollow + Why.” It seems many have forgotten the “why” but as Joe builds yet another of his “1,000%, 5,000% up to 20,000% position size hoax trades,” it’s a good time to revisit why we took such action over 1 year ago.

THE PROBLEM: OVERREACHING & HAVING NO CONCEPT OF RISK MANAGEMENT (wanting to make a “statement”)

Consider the following: At various times, @HedgeStrategy takes VERY concentrated, HIGH CONVICTION positions & there’s nothing wrong with that …. so long as you define risk, right? Step #1, check his stream & try to find even the hint of a STOP (defined RISK). Nope. Negative. Troublesome.  Next, have you ever actually taken a pencil to what a “1,000%, 5,000% or 20,000% sized position” would mean relative to a REAL MONEY portfolio? If you have, you’ve already clicked this CFP’s “unfollow” button but for those of you “captivated by the conviction,”  let’s actually check the AUM “tail of the tape.” This is where things really go rogue.

THE BREAKDOWN

*Presume Total AUM = 100% or $10,000,000.

*Presume Total FUTURES or CURRENCY Allocation of Total AUM = 10% or $1,000,000. Joe “allegedly” runs a Long, Short, Market Neutral Hedge Fund and invests across asset class including but not limited to – depending on charter – equity, options, debt, futures, currency, horses, lamps, glass blown dildos & all sorts of other “exotic instruments.” In all cases, the “Futures and/or Currency” allocations – as they’re levered trading instruments carrying HIGH RISK – is going to get just a small cut of the Total AUM.

*Basic Math: A total “all in,” 100% sized FUTURES or CURRENCY trade = 10% of Total AUM or a $1,000,000 trade putting 10% of the Total AUM at risk …. HOWEVER;

What happens when you GOOSE a total “all in,” 100% sized FUTURES or CURRENCY position or 10% of Total AUM ($1,000,000 out of your Total AUM of $10,000,000) up to a 1,000% trade size?

*WHAT HAPPENS IS YOU GET 100% OF TOTAL AUM (10% total Futures or Currency AUM x 1000% position size = 100% of TOTAL AUM) IN THE ENTIRE FUND, ON MARGIN, ON LEVERAGE BAKED INTO ONE FUCKING TRADE …. also known as “a hoax.”

A BETTER WAY

We’re not financial advisers or brokers or Estate planners & everyone has to manage + allocate their AUM in a way that suits their risk tolerance, age, personal situation, etc. Many of you – who manage outside money, which we do NOT – must take into account Sharpe Ratio & the like (my buddy @MicroFundy wrote a great article on this) but I can assure you, as the day is long, that NO real world money manager, trader, HF or PM ever has 100% of their Total AUM in ONE trade and if you find someone @ the Bar or Hockey Arena or in an Airport or, certainly, on Twitter who says they are, well folks, that there is the “mark” of a liar, a loser & a no asset having chimp ……… and that’s the bottom line.

Look, maybe guys like @reformedbroker who can go on “Fast Money” and scoff at a 56% misstep SS: $NFLX from October & laugh have the game all figured out but FOR THE REST OF YOU, REAL MONEY TRADING FOLKS, you know that with real money on the line you can’t “afford” even properly allocated trades hitting you for -56%. Our plight is simple; we run real money. We use STOPS. We define thesis along with scale entry range, target basis & price objectives like ALL PM’s who run real assets. We can’t tolerate -56% losses. We can’t take a @HedgeStrategy “all in, 100% of my Total AUM Fund value” in one trade because we manage risk & allocate assets properly.  If you want to stay in the game, you should too! 

Interested in seeing what asset allocation looks like on $10,000,000 trading across just four products; Real Estate, Equity, Options & Futures?

https://docs.google.com/document/d/1JDKIrk9pVJqjUgG8kzdeJUU2FJowS12hYUjw0cB0-SY/edit

REAL MONEY, REAL TIME:

We are presently SWING SS: a 62.5% position in $ES_F @ 1471.25. The trade is down. We trade with (as posted above) 12% of our Total AUM in our SWING Futures account, meaning IF we were to take our SWING SS: $ES_F position to 100% size (currently @ 62.5%) and LOSE 100% on the trade (there is no way, with a noted STOP, we’d lose 100% in any trade but we’ll humor you with the basic math) our Total AUM would suffer a draw down of 12%, however, if you’re running one of Joe’s Hoaxes at 1,000% size & the trade got clipped, well, you’re pretend Fund, like his, would be at $0.