Comparing hedge funds to retail investors

Sep 10, 2021

Here are some of the average profits and losses of the client of a Forex broker:

From the 01/03/2014 to the 31/03/2015 FXCM accounts on the GBPJPY:
- Average winner was 39 "pips" ("percentage in point" that are not percentages in points
- Average loser was 64 "pips"

In that period the GBPJPY ATR was:

- On daily candles 140 "pips"
- On 12 hour candles 90 "pips"
- On 4 hour candles 55 "pips"

So on GBPJPY their average "investment" was held for about 4 hours.
Remember the few investors holding for weeks or months push the average tremendously up.


And on USDCAD:
- Average winner was 61 "pips"
- Average loser was 75 "pips"

In that period the USDCAD ATR was:

- On daily candles 75 "pips"
- On 12 hour candles 55 "pips"
- On 4 hour candles 30 "pips"

So USDCAD was trending and clearly non-daytraders moved the average up, but still, it's the same on all currencies, a total disregard for the range (and safe to assume market conditions or structure) they all always go for "40 pips" "winners" no matter if that takes 1 hour or 16 hours.






Looking at profits assuming everything else is equal (lower timeframes don't add randomness), what would be most optimal?

Assume making 1R every 4 trades

Spread = 1.5p => -6p/4t

Here is the cost to performance:
15 min R = 3p ==> - 200%
4 hours R = 10p ==> - 60%
2 days R = 40p ==> -15%
1 week R = 75p ==> -8%
1 month R = 175p => -3.4%
3 month R = 350p => -1.7%
1 year R = 800p => -0.75%

There is a big advantage up to 1 week - 1 month, then past that it is not as significant.

Of course there is an optimal holding period, or at least optimal holding periods, and that is set by the market.


Hedge funds have all sorts of regulations, as well as the 2/20 scam. So even if the cost of their investing is -3% you can add 33% in fees. And then add heavy taxes but that's the same for all short term. Which is why they are bad. Especially since the dot com bubble, before that hedge funds actually did slightly better than the S&P 500 (the average of hedge funds including the baddies).

Of course 99% of day traders lose money so they do not actually make 1R every 4 trades (how could they when they go for a risk to reward of 2:1?) which means the cost to performance is above 100%.

Placing money with a hedge fund is throwing money out of the window and hoping the wind will push some back in, placing money by oneself as an individual investor is throwing money directly in the fire after pouring oil on it to be absolutely certain to never see it again. Maybe they all have a crush on their broker.


It is said that the more retail traders join the more money hedge funds manage to make, I do not know if this is true. What is confirmed is that HFT firms, market makers, brokers, and probably quants too, make money on the back of these "individual investors" that are in the vast majority day traders. There is not much more to it. Brokers have tried over and over to gain an edge but there is none. Academics have even on occasion cancelled papers because "the data was as random as it gets". Retail investors have 0 predictive abilities, there is absolutely nothing to extract. If the market goes up, they'll be selling, if the market goes down, they'll be buying, I could code them in 1 line: If (close > open) then sell (close-open) * (LOTS_CONSTANT). Tada!

Nothing special here... And nothing new, same thing as centuries ago they are dumb money that goes in the wrong direction fomos and focusses on very short term.