Quantitative Trading, 2nd Edition

CHAPTER 8Conclusion: Can Independent Traders Succeed?

Quantitative trading gained notoriety in the summer of 2007 when some enormous hedge funds run by some of the most reputable money managers rung up losses measured in billions in just a few days (though some had recovered by the end of the month). It is déjà vu all over again in January 2021. They brought back bad memories of other notorious hedge fund debacles such as that of Long-Term Capital Management and Amaranth Advisors (both referenced in Chapter 6), except that this time it was not just one trader or one firm, but losses at multiple funds over a short period of time.

And yet, ever since I began my career in the institutional quantitative trading business, I have spoken to many small, independent traders, working in shabby offices or their spare bedrooms, who gain small but steady and growing profits year-in and year-out, quite unlike the stereotypical reckless day traders of the popular imagination. In fact, many independent traders that I know of have not only survived the periods when big funds lost billions, but actually thrived in those times. This has been the central mystery of trading to me for many years: how does an independent trader with insignificant equity and minimal infrastructure trade with a high Sharpe ratio while firms with all-star teams fail spectacularly?

At the beginning of 2006, I left the institutional money management business and struck out on my own to experience this firsthand. I figured ...