Pretty much as written. Are there any mutual funds that use your money to engage in the high risk/high reward practice commonly known as day trading?
I’m NOT talking about whether or not I can engage in day trading of mutual funds.
I know that I should read the prospectus carefully before investing.
I don’t have any factual knowledge, but one practical problem would seem to be the volume. It’s very difficult if not impossible to quickly move into and out of huge positions.
When I worked at T. Rowe Price, they definitely didn’t have a fund like that, and a few minutes of Googling has failed to turn up any. It seems more like something that a hedge fund might do.
I have never come across any, and I have a hard time believe it would be possible. What you can do with $1 million is impossible to do with $1 billion.
For example, let’s say I like company XYZ and want to buy $10,000 of it. $10,000 is a drop in the bucket. Even small companies routinely have trading volumes in the hundreds of thousands and large ones in the many millions. So my $10,000 investment is easily filled out of a tiny percentage of the total trading action for the day. But an investment of $10 million… that might take days or weeks to fill and would dominate the trading activity for a small stock. Even for a large one, $10 million is nothing to sneeze at.
What happens to these large investors is they have to look at what people are really offering. When someone says that XYZ is worth $50.25/share, that’s just the last trade. If you have the right tools, you can see that there’s an offering of 100 shares at $50.50, 400 shares at $50.86, 5,000 shares at $50.92. And there are simultaneously buy offers of, say, 100 shares at $50.20, 1,000 shares at $50.10 and 800 shares at $49.90. These are unfilled buy offers because no sellers are willing to accept that.
To buy up 5,500 shares in this scenario means driving the price up from $50.25 to $50.92. And (assuming nothing else changes, like new sellers who are motivated by the increased price), this scenario means it’s impossible to buy 10,000 shares because they simply aren’t for sale.
This. In fact it is a point of active research as to how to effectively move into or out of large positions while minimally affecting price. Or at least discovering how moving into or out of a large position will affect price before committing to do that.
I would imagine that a day-trading mutual fund would not be moving 100% (or, for that matter, much more than 2-3%) of their capital in and out of a single stock. Rather, it would make more sense to day-trade on a large number (e.g., 50 or even 500) of stocks.
As a practical matter, I don’t see any way a mutual fund could turn a profit charging 0.5-1.5% in fees for this strategy, as the trading costs would be significantly higher. A traditional hedge fund charging fees of 2% & 20%, however, could probably make this work (in fact, some quant hedge funds have strategies that are arguably just a “dressed up” version of day-trading).
I’ve never heard of a managed fund whose primary strategy was to take advantage of intraday fluctuations as day traders attempt to do. However I believe that it is common for traders at hedge funds, proprietary traders, etc., to increase/decrease the size of the positions their funds hold as part of a long term strategy in order to also take advantage of short term fluctuations. This practice probably consists more of “swing trades” (positions held for a few days) than day trades.
Day trading is not high-risk, high-reward. It’s high-risk, low-reward. Even if you get lucky, your transaction fees will eat a big chunk of your profits.
An ex-colleague of mine, who now works at a private hedge fund, claims that their policy is to have no money in the market at closing time*. Their volume is thus at least double their fund size, and usually much larger. The fund is relatively small and I don’t know the exact size, but I suspect it’s easily in the billions.
This is true, for almost all day traders. I tend to think that saying, “X is a day-trader” is a polite way of saying “X is unemployed”.
[QUOTE=Dr. Strangelove]
An ex-colleague of mine, who now works at a private hedge fund, claims that their policy is to have no money in the market at closing time*. Their volume is thus at least double their fund size, and usually much larger. The fund is relatively small and I don’t know the exact size, but I suspect it’s easily in the billions.
[/QUOTE]
I’d guess from your description that your ex-colleague works at a high-frequency trading operation, which differs from casual day trading in the other direction – trading in and out so freakishly fast that they can only be executed by computer without any human involvement. They’re the kind of people who finance new fiber optic lines across the Atlantic just to be able to exploit changes in price between London and New York quicker, and fund development of computer graphics cards to use as giant floating-point units for their machines.
I don’t think any of those operations are open to anyone with a normal amount of money to invest, though.
I’d tell you where I work, but I think you’ve figured it out already.
Definitely not. Actually, my understanding is that the entire fund is set up for a handful of people. If you came to them with a billion dollars, they might just say no thanks, and that they’d prefer to keep their fund all to themselves.
If you want to do high volume, short term trades with lots of cash, you can’t really do stocks - the market is too small and you’ll move it with your trades. You can, however, do this in the larger markets - currency, natural gas, and oil. Possible for swaps, eurodollars, t-bills, and some other stuff too, if to a lesser degree.
I don’t believe this is the case. A number of large pension funds (CALPERS comes to mind) make significant investments in hedge funds, private equity funds and the like. The link may not be 100% direct, but pensioners (e.g., teachers, policemen, etc.) are absolutely invested.
I only meant this specific hedge fund. I’m sure that hedge funds are set up for all kinds of reasons and with different strategies, but this one is about as private an exclusive as they get.