I already wrote this article in February 2016, but then I was not aware of the problems that were waiting for me on the way I had to go through to solve all the problems, which I caused mostly by myself. That’s why, this is my new and the final version of this theme. As always of course, I will write this article out of my personal experience. Long time ago I’ve read an interview with Mr. Bill Lipschutz, explaining how the trading with somebody else’s money looks like and how can affect your trading and performance. Well, I couldn’t figure it out until I tried it by myself.
What I can say after couple of tries, mostly from 2016/2017 is that I felt literally everything that Mr. Lipschutz explains in the article (at the end of this post) and must say that, it was a very difficult time for me. I simply failed and couldn’t accept it. After that huge fails it took months for my mental recovery. Because of that fail, I have even stoped my hedge fund launching which was planned for 2016 and decided to work a lot on my psichology and my asset management trading skills. It was a great decision because I would surely fail with my hedge fund if I started unprepared as I almost did. After three years of hard work, now I can say that I was not even close to the necessary experience and knowledge for this type of work. I realized that it needed much more than a good personal performance, which I wasn’t aware of it before.
I thought that if I can make a 100 percent for my personal account, it will be easy for me to make the same for the investors account as well. But, it wasn’t like that. What I didn’t realize was, how the investors will react on loss and how their reaction will affect on my trading and the results. I mean, everything was great when I was making money, but when I started to lose, investors felt how they could give suggestions and advices, constantly asking questions, putting too much pressure on my shoulders. Sure, not all of them, but you need only one which can completely disrupt your trading. Of course, it’s their money and they felt they can do that. Well, they can, but on my oppinion only if you broke determinated rules, which must be set up before the beggining of trading. That’s why, the rules must be strict and strictly adhered to latter on. Sure, most of you will felt all theese problems by yourself when you decide to trade for others, but here’s my reccomendation for some of the asset and portfolio managers on how to prepare and to avoid all the problems which can totaly ruin your hard work, before you even started with this job.
On risk and loss
The most important one is for sure determinated risk and risk management. If an investor accepts a maximum loss of 20-25% on the investment and you have a decrease in his capital for those 25%, you have to stop trading immediately and disconnect his account at any cost. There is no excuses and explanations how and why, what next, etc. You’re done with his account, you’ve simply failed. On this solution and your proper reaction, you can normally continue with your trading with other investors or with your own account, it’s irrelevant. But, if you try to return the loss because the investor ask you or you want to, you are condemned to failure toward a complete collapse. You will not be aware of that at all. Sure, maybe you will succeed once, but you will come to the point of no return eventually, believe me. You have broke your own rules of maximum loss and you will do it again for sure. I mean, you’ve reached a 25% loss and for return attempt you need to risk more, right!? If you broke your own, the most important rule of 25% maximum loss, latter for ‘return’ the same it can be a 30 or 50% and then what? Sure, if your investor accept the possible 50% loss, you can continue without any pressure.
But, stick to your rules of determinad maximum loss, not on the investor’s or your desire. Because, your investor didn’t accept the 50% loss, if your maximum loss is detected at 25%. If you lose more then 25%, the investor has the right to seek compensation for the loss. Maybe not legally, but he can try it in all ways privately and it will completely disrupt you in further trading. At least, if you are a honest person, a man of the word, you will try to return the lost money, right. Then the problems starts with no end. Lucky me, I din’t have much of loss like this, but I did have and that’s why I know what comes to you if you decide to trade for others.
Furder on risk management and loss is this. When you set up your maximum risk per trade or on all your active trades on let’s say 3-5 percent, stick to that rule like your life depens on the same, because it is. Breaking of the risk management rules can cause you the same problems which I described above. In my oppinion, that’s the maximum percentege which can be allowed to take. It’s not much and it can be relativelly easy covered. Everything above it’s not easy to return, because you will have less opportunities to try. If you decide to take this risk per trade or per all opened positions at once, consider how your SL must be at least 0,50-1,00 percent far from the entry on currency pairs and at least 1,50-2,00 percent on commodities, depens on SR levels.
On gain and predicted income
When the question of gain is a matter and it always is when you search for the investors, this is how I see it now. Most of the amateur ‘asset managers’ promise huge returns on investment such as 500 percent with small risk, because they think how they will attract investors easy. Yes, they will attract mostly greedy once, amateurs who mostly can’t afford to lose that invested money. They can borrow that money, take a loan, which means how they will invest something they can’t afford to lose and they can cause a lot of psychical problems if trading went wrong and it will. Their problems will become yours and you will not be able to perform as you use to. You can easy lose your winning streak and become a constant loser, trying to return something what you shouldn’t lose in the first place. How I know this? Well, I did the same mistake with that promisse. It was my first and huge mistake in the beginning!
At first, let me repeat this. It doesn’t matter how much you can do with your personal account, 100 percent or 1000 percent, it’s apsolutelly irrelevant. I mean, I have dozens of proofs how I made x10 or x50 on the investment, but most of it with huge risk taken, sometimes with more then 50 percent per trade in this 0,70-1,00 or 1,50-2,00 percent SL rule. What matters is, how much you can do for others, with strictly determinated risk. Which means, how much you can make with let’s say 5 percent strictly taken risk per trade and a total possible loss of 25 percent, that’s what you must calculate. When you think this true seriously, I believe how you will see that you can’t predict anything for sure, right? Because, there is almost 1:1 possibility in each of your tries, to win or to lose. I mean, there is no guarantee how you will not lose 5 times in a row and made that 25 percent maximum allowed loss, right. That’s why, in my point of view, you can predict a maximum of the potential gain at the same percentage as the maximum allowed loss and go forward month by month. Long term predictions of income? Well, based on my experience, there is no such a thing in the forex market, especially for short term traders if the rules of loss are strict. Less you promise to win, easily you will reach the target and be comfortable to continue furder.
Never promise an unrealistic high income because of this. There is simply no quarantee of gain because each day in the market is different. You can’t predict the future, right? Only those who manage billions and who move the market long term can quarantee a specific return, mostly based on the previous results. They will make it somehow. But you, as a small player in the market can’t quarantee anything, especially not huge returns with low risk. That’s a science fiction. All what you can do is, to quarantee how you will strictly control your risk trying to reach your target and that’s it. Based on my experience, Risk/Reward ratio in your asset management program can be set at aprox 1:1. Which means that your target can be set at max. 30%, if your max. risk is set at the same procentage of 30%.
Psychology of the asset manager
Everything written above will affect your psychology if you broke your rules and if you start wrongly from the beginning, you will easily fell in to huge psychological problems. After all I’ve been true in the market, I confirm how psychology is apsolutely the most important part of successful trading. No matter how good your trading skills are if your psychology is not at the highest level, you will fail.
Trading for others is so much different from trading for your own account, you wouldn’t believe it. Once when you try, you will see how big this difference is.
It took almost three years for me 2016/2017 and 2018 partially to solve all the psychical problems that I had in trading after all my mistakes. But, was that years wasted for me then? Apsolutely not, this is inevitable way if you want to become a professional asset/portfolio or fund manager. I am glad that I have gone through these problems and obstacles on the road to the final success. After all, I am a way much different asset manager then I was, with a totaly different asset management program. As a trader for my private account, I am even much better then I was.
For that reason, if you don’t have experience in asset management, read this well and turn my suggestions into your rules. Otherwise, you need to pass all of those troubles with other people’s money personally. Trust me, it’s a difficult, tough and long road and I wouldn’t recommend it. Because, for each step forward you need time and money and there is so many steps on the way up. If you’re going wrong, you will go one step up, two steps back, remember that!
Bill Lipshutz – Trading with other peoples money
Acording to Jack Schwager, Bill’s trading at forex alone accounted for more than half a billion dollars profit for Salomon in the eight years he was there. That’s the equivalent of $250,000 profit each and every trading day for 8 years. Ok, that was at the end of the 1980’s, when Mr. Lipschutz was the head of Foreign Exchange at Salomon Brothers, but it’s surely put Bill in the hall of fame as one of the best FX traders in the world, what he was confirmed in the following years.
Bill worked at Solomon Brothers from 1982. to 1990. when he went and form his own company, Rowayton. They traded for a while and at the end of 1993., he and his wife started to raise ‘a little’ outside money. They raised about $150 million in about 18 months. While FX is the only thing they have traded, they developed three programs which all trade FX, but with different combinations of risk/reward objectives and different instruments, mostly day trading. For a variety of reasons, Mr. Lipschutz closed Rowayton in 1995. and formed a new company, Hathersage Capital Management. The company with similar trade programs as Rowayton, but much better in the administrative level. Trading with other people’s money!
It is often not realized that the source of trading funds can affect one’s trading style and performance. As Bill Lipschutz explains, this fact is something even the most experienced traders do not appreciate until they experience it. ‘I was unaware that different sources will definitely imply different trading strategies. The source of capital will invariably force different trading motivations on the trader. It is not simply a question of saying, “oh, I have some capital. It doesn’t matter what the source is. I will go out and do my best and at the end of the day try to make some money.” It is not like that. There are many, many different strengths that come from being a corporate entity, whereas dealing for high net worth individuals you do live and die by your monthly numbers.
‘The whole money-management game is a difficult game. It has not only to do with how well you perform, but what kinds of results investors are looking for in their portfolios. Absolute performance can be misleading.
As Bill Lipschutz explains, one way the source of funding can affect your trading style is through the motivation of the lender and the terms on which the funds were granted. We all, as traders, seek more capital with which to trade. Sooner or later, after a degree of success, we decide to seek out new sources of funds, whether as a loan, which then does not require us to be regulated, or as an investment by the lender. Whatever the source of money, you must be aware that since it can affect your trading style it may also affect your trading performance. The worse time to have a deterioration in your trading performance is when the money is not your own. Therefore, trading with other people’s money becomes far more complicated than with one’s own money. You have to consider both the likely outcome of the trade and the likely reaction of the investor to a positive and a negative trading outcome. So before you seek new funds think hard about how it is likely to affect your trading. It’s not an easy way!
This is only a small part from the interview with Bill, entire article you can read here. It’s apsolutely worh to read.