Traders, particularly within the retail sector, are surprised when informed that Hedge Funds are marketed as a product; legal structure, fees, talent and strategy are blended to create a commodity that is bought and sold by investors (this can include equity, for added perspective). With a product-orientated approach comes constraints that strictly govern the outcomes of strategies and traders alike, a thought-thread not commonly held by retail traders. In the case of Apex and Athena, we have found that the granular approach that comes with creating a product that has set desirable outcomes for investors creates natural guardrails that enable traders to increase their profitability. That said, lets dive into the tangible variables that the traders on our desk take into account that guarantees their profitability.

Leverage and Limits

Athena is registered in Luxembourg via its Special Limited Partnership structure. The structure allows Hedge Funds to incorporate in a AAA-rated jurisdiction with a sophisticated regulator. With this structure comes regulations surrounding the total assets under management (AUM) of the fund and the service providers used. For simplicity's sake, the larger the AUM, the more stringent the regulations on the increasing number of service providers the fund is required to use, the higher the operational costs of the fund. In Athena's case, we are limited to $100 Million of AUM. The challenge is as follows: the aforementioned figure includes the notional exposure created from leverage at any given stage.

How does this affect our traders tangibly? Given that futures contracts inherently contain leverage, the Athena team is required to keep an eye on the number of positions taken in individual portfolios and between between each traders portfolios. This brings about a quality over quantity approach, ensuring that traders take positions synergistically as, simply put, there is not enough room for all trades to be taken. It likewise brought about the observation that many traders use leverage to artificially increase their returns whilst having mediocre expected value / risk reward profiles, leading to blown accounts (go figure why CFD providers give retail access to 1:500+ leverage, excluding MiFID II in the UK). In essence, for traders to succeed, limits on leverage, exposure and number of trades contribute significantly to the integrity and longevity of the strategy and capital.

A note from an observation of expected value at Apex: Expected value describes the return that trading strategies generate over time, ideally in risk units. Concerning momentum driven strategies, the expected value of individual trade ideas decreases drastically as the number of failed attempts towards a given idea increase. In short, give trade ideas 2 failed attempts. After that, by and large, one is wasting monetary and mental capital.Why Gold and Bitcoin Are Smart Bets

Fund Objectives: What are you selling?

During the Athena capital raising process, we frequently came across, and still encounter the question, 'what makes you different? What are you selling?'. To the individual trader, goals are bound by the simplicity of generating above-average returns without blowing up. Although a noble goal, sophisticated investors require sophisticated goals: how liquid are the instruments that are to be traded? What does the lockup period look like? What are the targeted annual returns if absolute, or which benchmarks are you looking to outperform net of fees? Which ratio's are you going to hold yourself accountable to to ensure that you meet these targets? Are you selling Sharpe, Sortino, predictable cashflow etc.

To answer these questions we turned to our belief system: Apex was built with the investment principles of sound risk management alongside high performing strategies that generate risk:reward asymmetry. As our thoughts began to broaden, we began to observe strategies and funds as alpha archetypes as opposed to simply profit-generating instruments. Upon further reflection, our goals were clear: we seek a return of 20% annually net of fees, and hold ourselves accountable to Calmar (total portfolio return / maximum portfolio drawdown) and Sortino (portfolio return above the 10-year US treasury bond / standard deviation of downside returns) ratios in excess of 3. To do this, we incorporate a daily loss limit, maximum position size and a risk model conducive to reducing size when incurring consecutive losses (note the level of granularity). It’s natural to feel overwhelmed by the numerous yardsticks that are used to measure success. We felt the same. However, in practice, it is more simple than anticipated. These yard sticks amended our approach from simple traders at the wheel of a Formula-One-styled instrument, to methodical risk managers with the responsibility of implementing trading strategies with our absolute priority being minimising losses.

Trading Is a Team Sport. Read That Again.

Trading is a team sport. When dissecting established, high performing prop shops like SMB Capital / Kershner Trading Group, Trillium, Flow Traders etc. What does one notice? Capital and infrastructure aside, they work in teams or 'desks'. Each member of these desks contribute their strengths to their colleagues and firm, be it automation, backtesting, research, execution, technology etc. The degree of value-add compounds exponentially over time with numerous traders collaborating on multiple projects simultaneously. Resultant of which, professionals are faster, smarter and better equipped than the individual trader as they are able to cover more ground with differentiating specialties. Build a team, delegate, research, iterate and work hard. Deliver bite-sized, easily digestible edges that grow the desk's expected value.

Key Takeaways

I'm a fan of punchy, succinct and tactically useful newsletters. As such, I have compiled a list of the above elements that contribute to increasing performance when crafting your trading outcomes:

• Define your alpha archetype (strategy goals) and stick to them. Be nuanced and sophisticated. Set a benchmark, an expected annual return, strategy goals i.e. what are you selling (absolute return, Calmar, Sharpe, Sortino) and work backwards to create a risk model that facilitates achieving your goals. Refer to your investment beliefs as a starting point.

• Assuming you have a robust strategy with adequate expected value, long-term profitability has overwhelmingly more to do with keeping losses small than winners large, think, "Take care of your losers and the winners will take care of themselves". Limit the number of trades per idea, daily exposure and leverage capability. Focus on quality of opportunities and not volume of trades.

• Trading is a team sport. Build a trustworthy team that have similar investment / trading values. Delegate, research, iterate and work hard to deliver simple edges to achieve consistent, outsized profitability. The professionals compete with one another in teams, individuals should do the same.

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