A number of TradeKing account holders have already referred to their account as a "hedge fund" or expressed interest in becoming a portfolio manager for other individuals. So, is there a big difference between running an individual brokerage account and running a pool of money for other investors? Over at TraderFeed, Brett Steenbarger weighs in with his opinion of why being a portfolio manager is different than being a trader:
"As it happens, few traders end up making the leap to funds, even when they have talent. The reason is that most hedge funds are looking for multifaceted portfolio managers, not directional traders of single asset classes. That is, a portfolio manager (PM) will carry a number of positions in his or her book, many of which are not correlated and some of which may hedge other positions. Compensation for the PM is based on the performance of the portfolio, with a premium placed on risk-adjusted returns (i.e., the fund does not want a PM taking massive risks to make returns, a lesson recently exemplified in the SocGen episode). The portfolio, as a result, has to be diversified, and it has to hedge risk. Such hedging is often accomplished with options, futures, and other derivative instruments, not simply by adding to or taking off of positions.
For this reason, much of the day-to-day work of the PM is managing the portfolio--adjusting hedges, adding to positions at good prices, taking profits at good prices, stopping positions out at preset levels, keeping up to date on news and research affecting the portfolio, scouring for ideas to add to the portfolio; it is not taken up with daytrading. PMs may hold positions for a few days, a few weeks, or many months: much depends on their core strategies and competencies. At a good fund, traders will have expertise across a variety of strategies and markets, which provides the firm with diversification."
To back up his assertion, Steenbarger points to a recent book from Tim Sykes (An American Hedge Fund) that chronicles Sykes' career path from short-term momentum trader to full-time hedge fund manager. Despite being an above-average day trader, Sykes found himself weighed down with legal filings, portfolio management minutiae and the challenges of raising capital from deep-pocketed investors. At the same time, he confronted the hefty task of continually making money for investors while taking as little risk as possible.
What do you think? If you've ever thought about becoming a portfolio manager or hedge fund manager, do you agree with Steenbarger and Sykes?
[image: Hedge Funds for Dummies]
