[HN Gopher] Hedge funds have to be big
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Hedge funds have to be big
Author : feross
Score : 34 points
Date : 2025-09-30 17:46 UTC (5 hours ago)
(HTM) web link (www.bloomberg.com)
(TXT) w3m dump (www.bloomberg.com)
| themafia wrote:
| https://archive.is/v2bS5
| ioblomov wrote:
| Jinx!
| ioblomov wrote:
| https://archive.ph/v2bS5
| dmoy wrote:
| You can also subscribe to Matt Levine as a newsletter and get
| it in your inbox Monday-Thursday. Sometimes it's quite
| hilarious.
| themafia wrote:
| > The point of a financial market is to allocate capital to its
| most productive uses. Someone who is very good at allocating
| capital should be allocating a lot of capital, not her own
| Robinhood account.
|
| These two facts are not connected at all. There's no reason to
| assume the market cannot work or reliably find the "most
| productive" uses of capital in the aggregate.
|
| > And an efficient market would allocate a lot of capital to her
|
| Then that would give a single individual more control over the
| market than is healthy and would naturally tend towards
| inefficiency. The basic presumption here is that centralization
| of the economy around a limited number of entities is great for
| efficiency. I can find no examples in history of this and I can
| find many where this actually just increases corruption.
|
| Given everything we learned about the "too big to fail" era I
| find articles like this to be obvious and grotesque lies.
| gruez wrote:
| >These two facts are not connected at all. There's no reason to
| assume the market cannot work or reliably find the "most
| productive" uses of capital in the aggregate.
|
| Right, but just because it works "in the aggregate" doesn't
| mean that's how things work "should" work. I'm sure the road
| network would still muddle on if we allowed drunk drivers to
| drive, but we still ban them from driving. The article isn't
| even arguing for government intervention; it's just describing
| how things plays out naturally.
| fsckboy wrote:
| i had similar objections to yours but i would phrase the
| corrections differently.
|
| > _The point of a financial market is_
|
| no, the point of a financial market is to be a place where
| people who need money for lucrative projects can get it, and a
| place where people who have money can invest it, decoupling
| those transactions from the term of the investments and the
| irregularities of the different economic opportunities. To put
| it in simpler terms, think of the market of a town in medieval
| england, a financial market would allow you to know nothing in
| particular about farming but invest profitably in the farming
| activities of the town, getting what portion you want of your
| money back whenever you want it.
|
| > _to allocate capital to its most productive uses_
|
| is in the nature of a market that has the features markets need
| to function efficiently.
|
| The point of a financial market is capital allocation, and
| people will partake even if the market is inefficient. Consider
| illegal/black markets, they are often cited as truly free
| markets where you can invest large sums of cash or buy anything
| for a price, and even though the prices are high, there are
| customers. Those markets can be made more efficient, but the
| fact they exist shows the power of markets without efficiency.
|
| >> _And an efficient market would allocate a lot of capital to
| her_
|
| > _Then that would give a single individual more control over
| the market than is healthy_
|
| one of the features a market needs for efficiency (think of
| efficiency as "goods at a fair price") is that no participant
| alone can affect the prices; for that to be true there needs to
| be competition, and without it you get "market failure", a
| market where participants receive no benefit from
| participating. (markets should operate at a point where sellers
| are saying "that price offer is too low" and buyers are saying
| "that price offer is too high", but all the "great deal, I'll
| take it" transactions that already took place to get it to that
| point are were the happiness is created _from thin air_.) as
| new information emerges, prices can shift up and down to
| maintain that "take it or leave it" equilibrium.
|
| no system is perfect, not democracy, not the courts, etc., but
| regulations and people mostly acting sensibly even in self
| interest makes markets the best method we have of allocating
| happiness most effectively.
|
| being cynical about market capitalism is understandable, but it
| doesn't get you anywhere, other systems demand even more
| cynicism.
| gruez wrote:
| >no, the point of a financial market is to be a place where
| people who need money for lucrative projects can get it, and
| a place where people who have money can invest it
|
| But all things being equal, investors would like their money
| allocated into projects with the best returns. Borrowers of
| course would prefer that they get the money so that doesn't
| really tell us anything, but society as a whole would rather
| that worthy projects are funded rather than a linear city in
| the desert or whatever.
|
| >and people will partake even if the market is inefficient.
| Consider illegal/black markets, they are often cited as truly
| free markets where you can invest large sums of cash or buy
| anything for a price, and even though the prices are high,
| there are customers.
|
| A good that can't be acquired on regular markets has a price
| of infinity. A black market might be more expensive than some
| place where it's legal, but it's still cheaper than the
| alternative.
| fsckboy wrote:
| > _But all things being equal, investors would like their
| money allocated into projects with the best returns.
| Borrowers of course would prefer that they get the money so
| that doesn 't really tell us anything, but society as a
| whole would rather that worthy projects are funded rather
| than a linear city in the desert or whatever._
|
| you are describing the process by which competitive
| "jostling for the best returns / cheapest capital sources"
| produces market efficiency, which makes it pointless to try
| to find better returns or cheaper capital. Not having to
| think about that is a reward itself. The price of oil is
| established by auctioning off more oil every day; if you
| buy some at an auction, you're doing the best you can do,
| there is no better place to invest in oil, you can focus on
| driving your fleet of delivery trucks.
| fsckboy wrote:
| I studied a lot of finance in grad school, at world leading elite
| finance school, and I am a very successful investor myself and
| can give you sound advice up and down the market and quibble your
| use of terminology.
|
| (sad bear, or dog in lab with goggles meme)
|
| I have no idea what a hedge fund is.
| SatvikBeri wrote:
| There's no precise definition, but I prefer "funds that focus
| on alpha", as opposed to e.g. an index fund.
| fsckboy wrote:
| i'm not being snarky but, if you want to focus on alpha,
| construct a portfolio that removes beta, and nobody does that
| except portfolio theory.
|
| so probably "funds that focus on obtaining private
| information, or flaws in public information"?
|
| focusing on alpha and finding undiscovered alpha are not the
| same thing, and it's absolutely not clear and contrary to
| portfolio theory that you would succeed
| dinkblam wrote:
| I studied a lot of computer science in grad school, at world
| leading elite CS school, and I am a very successful developer
| myself and can give you sound advice up and down the dev space
| and quibble your use of terminology.
|
| ...
|
| I have no idea what a compiled language is.
| fsckboy wrote:
| i don't know what it means to not know what a compiled
| language is
| skybrian wrote:
| I believe they are saying that computer languages can be
| implemented by compilers and by interpreters, so "compiled"
| is technically a property of the _implementation_ , not the
| language.
|
| But in casual use, "compiled language" means a language
| that is usually implemented using a compiler.
| NoMoreNicksLeft wrote:
| > I have no idea what a compiled language is.
|
| This sounds like any of a dozen different computer science
| university programs I am familiar with.
| jiggawatts wrote:
| An interpreted language has a runtime that is essentially a
| function "i(script: string)" that immediately follows the
| instructions encoded in the string.
|
| A compiler is a function "c(script: string) -> byte[]" that
| instead of running the script, outputs a binary that does the
| same thing as the interpreter, but more efficiently.
|
| Commonly this means converting the human-readable script
| syntax to binary machine code that a CPU can run _directly_ ,
| but platforms like Java and .NET actually do this through
| multiple steps with an intermediate "byte code" that CPUs
| can't execute without a lightweight runtime.
|
| The benefit of the JIT is that it makes the compiler code
| portable to other CPU architectures without having to ship
| the source code. It is simple enough that interpreting it is
| just a "while" loop that bumps a pointer, reads the next
| instruction bytes, and uses a giant switch table to decide
| what to do.
|
| If you squint at it, machine code is the same, except that
| the "loop and switch statement" is hard wired into the
| silicon.
| wilkommen wrote:
| Big is bad, actually. Centralization of power in a small number
| of hands creates structural market distortions, generates
| corruption, and diminishes the freedom of all.
| loeg wrote:
| Maybe read beyond the headline.
| Herring wrote:
| The article covers like 6 separate finance topics (news
| commentary). OP is right about the first one, eg expect
| highly restrictive non-competes and lower compensation over
| time.
| xxpor wrote:
| That's certainly one philosophical point of view, but it's not
| universally true.
|
| https://www.theargumentmag.com/p/the-problem-with-bossbabe-l...
| Ekaros wrote:
| So either they have to be big to play outside public markets. Or
| small enough that they can still exploit things... For actual
| hedge I might actually want to go for later. Especially if you
| look at premiums on say EA. And possibility of getting your money
| out in reasonable time.
| mamonster wrote:
| >Somewhere out there is a person who's spent years running a 4
| Sharpe ratio at her $5 million friends-and-family hedge fund, or
| her Robinhood personal account, but she never gets a job at a big
| hedge fund.
|
| Weird numbers to pick here. I know like 10 guys off my personal
| contact list who can do 4 Sharpe at 5 million easy. The "game" in
| hedge funds isn't 4 Sharpe at 5mio AUM, its 1.5-2 Sharpe at 1b
| AUM or 1 Sharpe at 10b AUM, both of which are infinitely harder
| than 4 Sharpe at 5mio AUM. You can do 4 Sharpe at 5mio AUM after
| 6 years at a BB in anything that's not equities or delta 1.
| sjdfsjdfg93425 wrote:
| >You can do 4 Sharpe at 5mio AUM after 6 years at a BB in
| anything that's not equities or delta 1.
|
| Can you explain for a non-finance audience?
| missedthecue wrote:
| Sharpe ratio is a metric that measures how much excess return
| an investment earns per unit of risk. So if someone says
| "this fund runs at a 4 Sharpe," they mean the fund's returns
| are four times the volatility, net of risk-free rate.
|
| Super super ELI5 is that people don't like volatility in
| returns, even if the returns are good (i.e. down 40% one
| year, up 200% the next year is 34% CAGR, but crazy
| volatility). T-bills for example have extremely low
| volatility but also very low return. The holy grail is very
| low volatility with a great return. A 4 sharpe fund is in
| that quadrant.
| jklein11 wrote:
| Equities and "delta 1 assets" are very liquid, meaning there
| are a lot of buyers and sellers. This helps to make price
| discover more efficient. Anything outside of that means that
| there is much less liquidity and therefore inefficiencies in
| price.
|
| Think about it this way. You are trying to sell an apple. In
| one room, there are 100 people trying to sell an apples and
| 100 people trying to buy them. In the other room there is 1
| person trying to buy apples and no one selling. In the first
| room you don't have much leverage. The buyers can go to the
| other 99 sellers if they don't like your price. In the second
| room you have a ton of leverage. If the person wants to buy
| an apple they are either going to have to buy it from you or
| wait for another seller to enter the room.
|
| When it comes to non equity or delta 1 assets, there tends to
| be more complexity in understanding the assets, which acts as
| a barrier to entry. If you have been in investment banking
| for 6+ years, you likely understand these complexities and
| can find pricing inefficiencies.
| mamonster wrote:
| Sure, I'll give some numbers.
|
| Sharpe ratio = (Your return annually - Annual Risk Free rate)
| / ( Annualized Vol of your portfolio).
|
| BB = Bulge Bracket, basically a Tier 1 Bank (Goldman, UBS,
| MS, Citi, google the list).
|
| Equities = Stocks.
|
| Delta 1 = If underlying moves by X $, your product/
| derivative moves by X $. Basically swaps, etfs, futures, etc.
|
| Now for some numbers: Say you are under a "vanilla" 2/20
| structure (which is actually like 10 years out of date but is
| still listed on all finance websites) where your fund charges
| a 2% management fee (i.e if you manage 5 mio USD you charge
| 100k per year for fund cost) and 20% performance rate on your
| gross above benchmark ( so you take 20% of the return above
| your benchmark).
|
| Annualized SP500 vol is let's say 18%, your cash return right
| now is 3.5%. Quick maths gets you to 4 Sharpe is about 75%
| yearly return. ((75-3.5)/18 is about 4).Under these
| assumptions, 4 Sharpe return on 5 mio is 3.750mio.
|
| Your performance fee as a HF manager is gonna be
| 0.715(75%-3.5%) x 0.2 x 5mio = 715k. So 4 Sharpe on 5mio is
| basically you earning 900k-1mio USD (depends on the
| jurisdiction for your base, i took like 180k USD for base) as
| the HF manager.
|
| Edit: For people who don't trade professionally, capacity
| (i.e how much money your strategy/you as a trader accept
| before becoming inefficient/losing money) is the big filter.
| There's a shitload of strats that work at 1 mio USD but
| completely stop at 2mio or 5mio.
| rokobobo wrote:
| I think people were asking you to explain what kind of
| strategies people run at sharpe 4
| mamonster wrote:
| From people I know personally:
|
| "Arbs" on stuff that big desks don't touch because of
| capacity (small mergers for example, you lever up on 2-3
| small merger arbs per year and you are almost there);
|
| DEX to liquidity pool latency arbs for shitcoins if you
| want a crypto example;
|
| Pure arbs (One of my friends who admittedly is not
| satisfied with 1mio USD comp did this trade:
| https://notion.moontowermeta.com/financial-hacking-etf-
| vs-ne... ).
|
| Edit: The other option is that if you are a trader in
| "special" markets (the best example is biotech/medstocks)
| where domain knowledge really matters being 4 sharpe is
| basically 1 good trade a year, and at 5mio USD AUM you
| are always at capacity.
| bionsystem wrote:
| I wonder why people always assume that the strategy would
| be algorithmic or systematic. How about global macro,
| long/short equity, or even plain long only done well ?
| Actually studying markets and assets fundamentally, and
| finding asymmetric bets ? There are plenty of people that
| have done that successfully over really long periods of
| time, I doubt markets are perfectly efficient just
| because some academics claim so, especially for bets with
| strong convexity.
| em500 wrote:
| > Weird numbers to pick here. I know like 10 guys off my
| personal contact list who can do 4 Sharpe at 5 million easy.
| The "game" in hedge funds isn't 4 Sharpe at 5mio AUM, its 1.5-2
| Sharpe at 1b AUM or 1 Sharpe at 10b AUM, b
|
| So how do they do that? I'm a lot closer to 5 million than than
| 10b...
| therobots927 wrote:
| These guys with 4.0 sharpe ratios at 5M AUM... are they running
| algos and if so at what time frame? I'm assuming building out
| the data / execution infra for that is expensive, not to
| mention the compute and storage power required to identify
| market inefficiencies after you have the infra built. You're
| looking at a pretty significant upfront investment for that.
| dmoy wrote:
| > Weird numbers to pick here. I know like 10 guys off my
| personal contact list who can do 4 Sharpe at 5 million easy
|
| Sure, but the pool of people who can get into hedge funds
| overlaps a ton with the pool of people who have done "6 years
| at a BB in anything that's not equities or delta". That's
| like... where hedge fund recruiters go poaching, isn't it?
|
| I think the article was talking about random retail investors
| who can do this stuff, which seems relatively more rare.
| ivape wrote:
| The WSB community most likely obliterates that metric, and I
| mean the broader community not the regards buying lotto
| tickets. You don't need to look at Hedge Funds for good
| trading, you need to look at them for insider trading
| knowledge. IMHO that's all they have on others because the only
| data that's not available is that ... inside stuff.
| neilv wrote:
| A bit off-topic to the post, but maybe very relevant to HN
| techbros seeing this article, and musing about becoming (lower
| caste) finance bros...
|
| You know how there's a boots on the ground truth to what an early
| tech startup's Incentive Stock Options are actually worth
| nowadays, and how people should think about them (but that most
| startups won't admit)?
|
| With that secret reality in mind, how should software engineer
| candidates considering working for a hedge fund or private equity
| job think about the compensation there? Maybe especially about
| "carry"?
|
| A recruiter for a firm seeking a "Principal" level engineer,
| which would require moving to NYC, mentioned compensation of "$X
| salary, 50% bonus, and $Y carry". Where $X is a usual current
| non-FAANG Senior+ startup SWE salary, and Y is only a bit larger
| than X.
|
| The recruiter opened by stating the single number $((X*1.5)+Y),
| as if it were the annual TC familiar to us from levels.fyi.
|
| When I Google for "carry", it sounds like some speculative share
| of something unclear about some investments the firm owns or
| manages, and then this share might vest over 5-10 years, if I
| remain with the firm that long. The $Y dollar amount sounds like
| it's a fixed amount bonus or capped value of a share. Also
| unclear whether there's an additional $Y+ grant of carry each
| year.
|
| If this were most tech startup ISOs, I would know that the ISOs
| were probably worth $0 or less, and in some ways rigged to be
| that way, even if the company has a successful exit from which
| people with real shares profit.
|
| For this $((X*1.5)+Y) job, the $X salary alone will cover a
| lifestyle of renting a modest apartment in Brooklyn, plus decent
| savings building from whatever the rest of it is. I'm unclear
| whether the bonus and carry make it even competitive with Google
| L6, though.
|
| What do I need to know about "carry" or other aspects of the
| compensation? What time horizons, conditions, and probabilities
| are involved?
| stanford_labrat wrote:
| My portfolio was +94% in 2024 and +52% in the past 6 months (I
| took a massive haircut thanks to April's tariff saga and by
| having biblical levels of greed...lesson learned).
|
| How do I declare for the inaugural Hedge Fund Draft?
| ivape wrote:
| Why would you want to work anywhere if you get returns like
| that every year?
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