- Full-time trading demands significant investment, effort, and skill
- The same principles of smart trading apply for beginners and professionals alike: research, strategy, and risk management
Understand The Nature Of Markets
Turning pro in the world of investing is a dream for virtually every trader who loves the markets and understands their nature. Having your own trading company can help your growth, your experience, and, of course, increase the number of assets you manage.
What does it take, then, and how hard can it be for you to turn trading into a full-time career? Firstly, the trading you are currently involved with does not fundamentally differ from the trading you would be doing as a pro. In other words, institutions trade the same stocks, currencies, commodities, and cryptocurrencies.
In this light, it is crucial for you to understand the nature of markets so you can be prepared when you enter the industry. Once you become an institutional investor, you should know how to elevate, or scale, your trading.
To do that properly, you first need to be successful as a retail trader. Only then can you effectively make the step and start looking for investors who would back your trading adventure with your own fund.
Find Your Sector And Keep Learning
Being a retail trader today gives you enormous capabilities in financial markets. You can open multiple positions, use leverage, go long and short, and trade hundreds of assets. To this end, you cannot realistically expect to be good at every market, and understand how their work, so you could find those assets that best fit your trading style.
In more detail, when you have exposure to different markets, you can see where you are strong so you could make money there. You might want to focus on that particular sector which brings in the most profits.
In the world of institutional investing, those who trade as a profession are called hedge funds, or investment funds. There are now about 10,000 hedge funds globally, and collectively they manage about $4 trillion in assets. For their part, assets would be the total sum of cash, stocks, and every other financial instrument in a portfolio.
Four Main Investment Strategies
Further, some of these hedge funds are focused on one trading strategy, while others prefer another market approach.
In short, there are four main categories for the hedge fund industry:
- Global Macro
- Equity Hedge
- Event Driven
- Relative Value
Global Macro investors trade the global financial markets in their entirety. This investment strategy aims to profit from broad market moves all around the world. If you want to incorporate trading forex, stocks, crypto, indexes, and commodities, this strategy is for you. You can trade the EUR/USD, and go into Asian markets in anticipation of the opening bell for Japan’s Nikkei 225 stock index.
Equity Hedge investors are focused mainly on trading equities, or stocks. This type of investment strategy is based on opening long and short positions in any stock across financial markets. Here, investors use fundamental techniques and interpret data in order to get an edge in trading. You can be focused on a specific sector like healthcare, or have a broad range in terms of exposure.
Event Driven hedge funds make their money in times of volatility caused by news and events. More precisely, they approach the market seeking some sort of activity that could propel their positions to profits. This could be an earnings release by a corporation, or a jobs report for a whole economy. Events, or news, are a key driver in financial markets and offer solid prospects for gains if you can analyze them correctly.
Relative Value investors aim to exploit price inefficiencies through so-called arbitrage trading. In other words, relative value is a strategy that takes advantage of mispriced assets that are expected to revert to their fundamental value. This could mean an investor might buy an undervalued stock that could be greatly pressured but expected to move higher. On the other hand, the same investor might sell a certain stock if it is considered overvalued and expected to go down in value.
Why Is Money Management Important?
If you want to become a professional in trading, you have to understand why investors are called money managers. The short answer: because they manage money. The long one? A bit more complex.
Professional money managers can manage two different types of money: their own and their client’s money. Those who go and trade in the markets with their own money are called family offices. This type of investment vehicle is lighter in terms of regulations and suggests you would be trading only for your personal account.
The other type, running other people’s money, is called a hedge fund. The name is derived from one of the main distinctions in this investment vehicle: hedging. A hedge fund is an investment fund that can offset its positions simultaneously. In other words, they could open long and short positions across markets.
Regardless of the type of money structure you choose, you have to be good at money management. Choosing your trading sector from the four main types will help you assess your own money management by the trading results you get.
Why Is Risk Management Important?
Another highly important management skill you need to master is your approach to risk. Having a hedge fund, or a family office, would ideally mean you have balanced your exposure.
Overall, your portfolio has to be positioned in a way that would allow you to reach your trading goals. In practice, you can choose a high-risk portfolio which would mean holding assets that are more volatile and tend to swing more. They can get you more returns, but also carry more potential for losses if your trades turn against you and you don’t use proper trading setups. High-risk assets would be cryptocurrencies, technology stocks, and certain volatile currencies like the New Zealand dollar and the pound.
There are also low-risk assets that you can trade if you want to keep your risk tolerance to a lower level. In stocks, low-risk assets are considered those in often less glamorous or old-fashioned industries.
How To Take The Leap And Turn Pro
If you have decided to pursue a professional trading career as a fund manager, you have to secure one thing the most: money.
The average size of a small hedge fund is $37 million, according to data from Eurekahedge. The bigger the size of the fund, the more money it manages. The top 10 largest funds manage an average of $7 billion. And the biggest hedge fund in the world, Bridgewater Associates, is responsible for overseeing as much as $150 billion.
To this end, analysts say a startup hedge fund should be looking to manage north of $5 million. If you can secure that, you can consider opening your own hedge fund, or family office. In case you don’t have the money, you can go into funding rounds and pitch your investment strategy to outside investors. This is how most of the biggest names in the industry have come where they are now.
Let’s take a look at a few and see how their trading career accelerated.
How The Big Names In Investing Did It
Ray Dalio is a global macro trader and the founder of the world’s biggest hedge fund, Bridgewater Associates. He started out in 1975 when he founded his company out of his apartment. Mr. Dalio took his first steps in trading when he was just 12 years old.
He would work as a caddie and listen to Wall Street bankers discuss investment opportunities. His initial investment was just $300 in shares of Northeast Airlines. Shortly after his purchase, the company was acquired and he tripled his money. The rest, as they say, is history, and today, his personal fortune is roughly $20 billion.
Paul Tudor Jones
Paul Tudor Jones is another billionaire who got his start as a small retail trader. He founded his hedge fund at age 26 and has amassed a staggering $7 billion under his name. His focus is on macro trades like currencies and stock indexes. In his early days, he would trade as a retail trader with a few thousand dollars collected from friends and family.
A legendary trader and a pioneer of the hedge fund industry, George Soros is famous for his aggressive bets on currencies and whole economies. He rose to fame in 1992 when he “broke the bank of England”. Then, the UK had to exit the Exchange Rate Mechanism (ERM) due to its inability to keep the pound above the lower currency exchange limit required by the ERM.
In his early days, George Soros was an ordinary trader at an investment bank. On September 16, 1992, dubbed the Black Wednesday, Mr. Soros had already bet more than his entire fund in a short position in pounds; in a single day, he pocketed over $1 billion from the collapse of the British sterling.
In the context of today’s wide access to the global financial markets, becoming a professional trader is more than possible. But, in order to be successful and make trading your business, you have to maintain an edge in trading and always stay ahead of the curve. This includes having a trading strategy, choosing your investment approach and, of course, picking the number of assets under management.
What’s The Difference Between A Retail Investor And An Institutional Investor?
The difference is that a retail trader operates with a lot less money. Before you can be a professional money manager, it is good to have a proven track record of successful investments as a retail investor. This will help you gain more money from outside investors for your investment vehicle, ie hedge fund.
Why Is Money Management Important?
Professional money managers can manage two different types of money: their own and their clients’ money. Those who go and trade in the markets with their own money are called family offices. This type of investment vehicle is lighter in terms of regulations and suggests you would be trading only for your personal account. Proper money management will help you stay in the game as long as possible and grow your account.
Why Is Risk Management Important?
Having a hedge fund, or a family office, would ideally mean you have balanced your exposure. In other words, your portfolio is positioned in a way that would allow you to reach your trading goals. The speed of your progress can also be affected by your risk appetite and the extent of your risk management.