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This is a good question! Some possible answers - 1. Infrastructure that is too expensive or too hard to build yourself (eg colocation, low latency data feeds, compute clusters, fpgas) 2. Data that is too expensive or simply impossible to buy (eg historical tick data)https://twitter.com/mobile_mm/status/1373427747901542402 …
3. Scale. Say you have $100k in your account. If you are willing to have 30% annual vol and Sharpe 2 you can make $60k in your first year, $96k in your second year, $150k in your third year (minus data and infrastructure costs of course).
If you trade for a hedge fund you maybe get a 15% cut and a $50m allocation with 5% annual vol so you make $750k ($50m x 5% x 2 x 15%) in your first year (minus data and infrastructure costs).
4. Downside risk. Say you have a 1x vol drawdown in a given year. In your personal account this is a loss of 30% of your capital, and you still need to eat and make rent. At a hedge fund you probably get fired but you still make your $150k salary and you can look for a new job.
5. Track record. If you have ambitions to launch a fund, your current employer may help you with the set up, seed you and audit your track record for prospective investors. If you have been trading your PA all this is much harder.
6. Ops and back office. If you work for a fund they probably provide you with IT and hardware support, a risk system, pnl tracking, maybe trade execution and position management (rolling futures, handling dividends, stock splits, delistings etc) which you do yourself otherwise.
7. Market access. Some strategies require leverage and shorting, both of which are hard and expensive to access in a personal acct but easy and relatively cheap for a fund/prop shop with good broker relationships.
Also, the variance of even a very high performing strategy is a lot for most people. Simulate a bunch of GBM processes with returns 2x vol. Observe how often and for how long they are underwater.
Very good point! Even good strategies have down or flat years, and you still need to pay your costs in those years, plus your rent/mortgage/living costs. At a fund or prop shop most of your costs are top line and you still collect your base in a flat year.
8. All these strategies work until they don't. I suspect the shelf life was getting shorter over the last 20 years. So connected to 4, 1 + R&D costs
And downtime costs
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