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Performance distribution of retail investors and hedge funds
My thoughts about performance. This kind of info is not very available so I have to do some guesswork. We that spend all day in front of the computer expect to get better returns than 10% a year. But we have no idea what is possible and where we "rank" compared to others. All academics look at ever is day traders, yes 99% of day traders lose money and 1% earn peanuts while taking huge risk, we get it. And sometimes they look at passive investors. Cool. But no one ever says anything about active investors or Forex speculators, just that "on average active retail investors outperform", how wonderful, the average, yes I'd call myself the average normie definitely LOL! And regulators are even worse, all they care about is protecting dumb money and scaring people away from day trading. The french "market authority" on television was literally screaming "flee Forex it is dangerous, you should fleeeeeee!", I kid you not.
First we look at retail investors.
So the french "market authority" (AMF) looked at FX & CFD brokers representing about half of the individual FX & CFD investor population. 14799 persons in the 2009-2013 period.
They found that over 4 years close to 90% of traders lost money. This is another of their deceptive tricks.
It's just as with science these days, the data says something, the abstract says the opposite.
So according to the extremely biased french AMF OWN DATA:
- 30% of traders are in the "0" column, and according to their own data there aren't that many traders with tiny accounts, so ~30% breakeven.
- They refuse to give any % result, some may be recalculated by overall we do not know, therefore I will assume it does not look as bad (or they'd show)
- 5% of all investors make 2/3 of the losses, or at least half
- 1% of all investors only are actually making significant returns (and 2/3 of the total)
- As always day traders that destroy the stats are mixed with the rest
- Most "winning" traders are barely above 0, making just a few hundreds to thousands a year
amf-france.org/fr/actualites-publications/publications/rapports-etudes-et-analyses/etude-des-resultats-des-investisseurs-particuliers-sur-le-trading-de-cfd-et-de-forex-en-france
From other sources and the AMF sort of confirms this, we know that:
- Losers (especially big losers) that stick to investing, the ones that never give up never surrender in the face of adversity, the courageous ones with "heart", ye these guys, their losses get bigger and bigger actually.
- Most winners continue to win and their profits get bigger.
Here page 19, this is for stocks, we can see the net monthly market-adjusted returns of 62,439 households a large discount brokerage firm from
January 1991 to December 1996:
- On average, as they keep hammering us with, they underperform the market by 0.14% (each month!)
- The average individual investor gross returns are slightly above the S&P 500 index returns (page 3)
- The average individual investor net returns are slightly below the S&P index returns (about 91% of the S&P)
- The S&P returns a bit less than 1.5% monthly
- The worst of the worst managed to return -20.85% below index monthly, probably a permabear day trader or something
- The 1st percentile is at -4.86% below market, 5th at -2.45%, and 25th -0.73%
- The 99th percentile is at +4.44%, 95th +2.15%, 75th +0.50%
- The best individual investor got 48.35% above market MONTHLY
- The best individual investor difference between net and gross is minuscule, obviously it is not a day trader, probably some lucky investments
- The gross median return is at -0.01%!
faculty.haas.berkeley.edu/odean/papers/returns/Individual_Investor_Performance_Final.pdf
So it seems this is how it goes, a normal distribution:
We do not have that much info, and what little there is is rather hard to find, and hidden behind mountains of trashy scams "how much money can I make day trading join my course". I really only care about my own performance but it's always interesting to see how it's all distributed, what is possible, etc. For some reason I am interested in patterns and statistics. Funny. The info does not get shared a lot. Based on research and what gets exchange it seems most "traders" are VERY interested in money and "lambos" and very few are interested in stats, patterns, numbers. Ye I mean what do stats and figures have to do with investing right? It's not about some numbers it's about how much money you can make trading on a phone and what you will do with all of that money right? Honestly if we eliminate day traders that already make up at least 2/3 of FX investors, and all the lambo trolls that hate numbers but "it's ok I manage my emotions", it's not 10% making money but 30% at least I am sure, and 10% making decent money (enough to start a real career). Would be nice if they could just once separate day traders and look at FX investors with a time horizon greater than 1 day. All we can do is guess more or less, obviously more than 10% of these make money, but has to be less than 50% very probably. 10 to 50%, that's pretty wide. Probably in the 20-40 range, that's all I can say with high certainty.
Hedge funds next.
Hedge funds were doing great in the 90s and Morgan Stanley has a doc about them here:
morganstanley.com/institutional/qs/pdfs/msdw0011_why_hedge_funds.pdf
Page 6 we can see discretionary funds making 18% a year with a max drawdown of only 5%. For all strategies except perma-bear the max drawdown is smaller than the annual returns. With all the regulations and harder market (and little fixed income) the results today are probably not as good but I do not think they are extremely different either.
My guess on how hedge funds fulfill their max drawdown obligations is they place most the money somewhere safe (92% of the whole in case of an 8% drawdown) and then they risk the entire 8%, they might give a bit of it to each of their traders that go aggressive, and if they return 100% on the 8% that's an 8% return overall. I'm pretty sure that's the idea. But they might not freeze the entire capital and go 10X leverage, maybe they do something more complicated, with 50% in cash/bonds, 30% in "safe enough" investments, and 20% in high risk active trading with a max drawdown of 25% on these 20% (so 5% overall). The definitely do something like this, have to. The serious ones at least.
The S&P returned 17.2% with a max drawdown of 15.4%, and page 4 we can see again a normal distribution:
- The median directional return yearly was 16.3% (0.9% below market!) and median max drawdown 28.5%
- The 75% percentile made 20.5% (3.3% above market), remember retail 75ers were 0.50% above mkt monthly
- The 25% bottom only make 11.1% which is 6.1% below market for the year
- Stock selection has similar drawdown and the returns of the 25, 50, 75 are 12, 17.2, 20.9
- There are no giant losers or giant winners but there aren't 66000 funds, and they have restrictions
- In particular
So actually pretty similar thing. The major difference is around 15% of the retail stock investors lost money in a raging bull market and no hedge funds did (except the few bears I guess). Otherwise, same normal distribution but with less extremes for hedge funds, they're more compact around the center (market).
First we look at retail investors.
So the french "market authority" (AMF) looked at FX & CFD brokers representing about half of the individual FX & CFD investor population. 14799 persons in the 2009-2013 period.
They found that over 4 years close to 90% of traders lost money. This is another of their deceptive tricks.
It's just as with science these days, the data says something, the abstract says the opposite.
So according to the extremely biased french AMF OWN DATA:
- 30% of traders are in the "0" column, and according to their own data there aren't that many traders with tiny accounts, so ~30% breakeven.
- They refuse to give any % result, some may be recalculated by overall we do not know, therefore I will assume it does not look as bad (or they'd show)
- 5% of all investors make 2/3 of the losses, or at least half
- 1% of all investors only are actually making significant returns (and 2/3 of the total)
- As always day traders that destroy the stats are mixed with the rest
- Most "winning" traders are barely above 0, making just a few hundreds to thousands a year
amf-france.org/fr/actualites-publications/publications/rapports-etudes-et-analyses/etude-des-resultats-des-investisseurs-particuliers-sur-le-trading-de-cfd-et-de-forex-en-france
From other sources and the AMF sort of confirms this, we know that:
- Losers (especially big losers) that stick to investing, the ones that never give up never surrender in the face of adversity, the courageous ones with "heart", ye these guys, their losses get bigger and bigger actually.
- Most winners continue to win and their profits get bigger.
Here page 19, this is for stocks, we can see the net monthly market-adjusted returns of 62,439 households a large discount brokerage firm from
January 1991 to December 1996:
- On average, as they keep hammering us with, they underperform the market by 0.14% (each month!)
- The average individual investor gross returns are slightly above the S&P 500 index returns (page 3)
- The average individual investor net returns are slightly below the S&P index returns (about 91% of the S&P)
- The S&P returns a bit less than 1.5% monthly
- The worst of the worst managed to return -20.85% below index monthly, probably a permabear day trader or something
- The 1st percentile is at -4.86% below market, 5th at -2.45%, and 25th -0.73%
- The 99th percentile is at +4.44%, 95th +2.15%, 75th +0.50%
- The best individual investor got 48.35% above market MONTHLY
- The best individual investor difference between net and gross is minuscule, obviously it is not a day trader, probably some lucky investments
- The gross median return is at -0.01%!
faculty.haas.berkeley.edu/odean/papers/returns/Individual_Investor_Performance_Final.pdf
So it seems this is how it goes, a normal distribution:
We do not have that much info, and what little there is is rather hard to find, and hidden behind mountains of trashy scams "how much money can I make day trading join my course". I really only care about my own performance but it's always interesting to see how it's all distributed, what is possible, etc. For some reason I am interested in patterns and statistics. Funny. The info does not get shared a lot. Based on research and what gets exchange it seems most "traders" are VERY interested in money and "lambos" and very few are interested in stats, patterns, numbers. Ye I mean what do stats and figures have to do with investing right? It's not about some numbers it's about how much money you can make trading on a phone and what you will do with all of that money right? Honestly if we eliminate day traders that already make up at least 2/3 of FX investors, and all the lambo trolls that hate numbers but "it's ok I manage my emotions", it's not 10% making money but 30% at least I am sure, and 10% making decent money (enough to start a real career). Would be nice if they could just once separate day traders and look at FX investors with a time horizon greater than 1 day. All we can do is guess more or less, obviously more than 10% of these make money, but has to be less than 50% very probably. 10 to 50%, that's pretty wide. Probably in the 20-40 range, that's all I can say with high certainty.
Hedge funds next.
Hedge funds were doing great in the 90s and Morgan Stanley has a doc about them here:
morganstanley.com/institutional/qs/pdfs/msdw0011_why_hedge_funds.pdf
Page 6 we can see discretionary funds making 18% a year with a max drawdown of only 5%. For all strategies except perma-bear the max drawdown is smaller than the annual returns. With all the regulations and harder market (and little fixed income) the results today are probably not as good but I do not think they are extremely different either.
My guess on how hedge funds fulfill their max drawdown obligations is they place most the money somewhere safe (92% of the whole in case of an 8% drawdown) and then they risk the entire 8%, they might give a bit of it to each of their traders that go aggressive, and if they return 100% on the 8% that's an 8% return overall. I'm pretty sure that's the idea. But they might not freeze the entire capital and go 10X leverage, maybe they do something more complicated, with 50% in cash/bonds, 30% in "safe enough" investments, and 20% in high risk active trading with a max drawdown of 25% on these 20% (so 5% overall). The definitely do something like this, have to. The serious ones at least.
The S&P returned 17.2% with a max drawdown of 15.4%, and page 4 we can see again a normal distribution:
- The median directional return yearly was 16.3% (0.9% below market!) and median max drawdown 28.5%
- The 75% percentile made 20.5% (3.3% above market), remember retail 75ers were 0.50% above mkt monthly
- The 25% bottom only make 11.1% which is 6.1% below market for the year
- Stock selection has similar drawdown and the returns of the 25, 50, 75 are 12, 17.2, 20.9
- There are no giant losers or giant winners but there aren't 66000 funds, and they have restrictions
- In particular
So actually pretty similar thing. The major difference is around 15% of the retail stock investors lost money in a raging bull market and no hedge funds did (except the few bears I guess). Otherwise, same normal distribution but with less extremes for hedge funds, they're more compact around the center (market).
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