With all the discussion on super traders, audited returns and other fun stuff Id like to comment on something you may find interesting. In short it is the world of making money with a minimum of crazy frenetic trading. Its a world apart from hedge funds but in many cases the results are buried, obfuscated or completely hidden from view. As a matter of opinion I personally believe this secret world is bigger than the fully disclosed world. It is important to note the two worlds occasionally intersect. I'll give a few general examples and then I'll add some suggested reading.
The primary players I am aware of are as follows:
1. Large rich families who have hired investment talent full time.
2. Operating companies who hide trading results under ---"other income"
3. Insurance companies investing float.
Group 1. In a play to diversify from the primary family business, numerous families are investing in financial talent to execute a variety of plans. Family members roam the globe in search of money managers who will allocate funds among hedge funds, prop trading firms and to execute an "in house low frequency macro plan" I will not quote the performance of some of these entities since it is all over the map --- some groups have staggering performance.
Size --- dont ask, it is much larger than has been reported by CNBC or the mainstream press.
Group 2. Operating companies --- Any number of industrial companies have gone "off the reservation" in their treasury and finance operations and are running financial operations which are reported to the public as computer companies, auto companies etc... You can find some character trading S&P futures in an industrial company where there is no legitimate reason why such contracts should be traded.
Furthermore, due to lack of enforcement resources, the SEC is not in a position to police this trading activity and demand the appropriate disclosure. IMHO this sort of trading is a hidden but substantial risk to the American economy -- and in some cases the traders actually dont understand the art of appropriate risk management.
Naturally this hidden trading is in the hundreds of billions with results which are unreported as such and is highly variable. In some cases this activity provides more than 100% of the profits of the operating company. (whats that??? yes the actual main line operating company produces a loss) Of course one can include billions of over the counter derivatives as instruments traded by these entities.
Group 3. -- My favorite area of secret trading is that which is done by a variety of insurance companies. As you know, insurance companies invest float with a variety of results. All of you have heard of Warren Buffett, but have you heard of the managers who invest the float of Markel, White Mountain and numerous other seriously talented money managers who do not bill themselves as traders.
Relative to currencies I'd like to make a point which may appeal to those who have a day job and are concerned that you might not be able to make money in currencies unless you trade about 50X/day... The Berkshire Hathaway currency profits were just released a few hours ago. Pre-tax FX gains at BRK were 1.839 billion in 2004. This was spread among 12 currencies with an EOY notional value of $21.4 billion. Keep in mind this is a super conservative low leverage operation. I'd also point out that you can go to the UBS website and draw you own conclusions relative to the marginal utility of the two operations. Personally I found it interesting to compare an operation that has access to some of the smartest MBA's in the world, liberal capital, tremendous institutional knowledge, unlimited research, unlimited trading skill, the highest order flow, the ability to run stops at will --- to one junk food eating midwestern iconoclast...
A number of Insurance companies use hedge funds including my favorite insurance company --- but the bulk of assets are invested by a bunch of nameless bland guys who eat tuna fish sandwiches.
I saw one presentation last year where the fixed income returns of an insurance operation would make Bill Gross proud.
If you have a bit of free time and interest I would suggest that you go to the Berkshire Hathaway website and read p.19 of the shareholders 2004 letter --- the rationale behind the Berkshire FX positions is provided.
Finally if you are a frequent rabid successful trader --- I consider your profession noble, fascinating and something I cant actually do without, its just that often I receive messages wondering if there is a different slower paced way of making money. I claim there is and it may just
suit your personality...
Thanks for allowing me to ramble with this wide ranging disorganized topic --- best of luck no matter how you trade.
For skeptics --- I've found being critical is the root of all progressive thought. Please assume I have absolutely no direct or indirect knowledge of any of the above and this post has merely been presented as a work of fiction for your personal entertainment.
ALTMAN - Charlottesville, VA .
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