Brilliant piece. I'm still puzzled about the way capital pods are closed after small losses. I understand that capital can be moved but the closure could create incentives to go mild... (So you can keep playing)
And isnt that also against the idea of managing a portfolio of different strategies?
Millenium is the prime example for what you mention (Citadel does not manage risk this way).
But my understanding is, it's part of the offering Israel E. makes to its investor: we target 15% return but with limited downside.
In effect the very strict loss they allow their PM to have almost follow rules you can find with most of the successful trader ie after x% you exit a losing trade.
You take multiple trades and with this risk cutting rule you end up with a skewed positive return profile.
Difference here is that the pod team "are the trade that can be cut".
Continuing discussion along the control/economics/governance would be interesting. In any case, this is a great read for my students next academic year!
Brilliant piece. I'm still puzzled about the way capital pods are closed after small losses. I understand that capital can be moved but the closure could create incentives to go mild... (So you can keep playing)
And isnt that also against the idea of managing a portfolio of different strategies?
Millenium is the prime example for what you mention (Citadel does not manage risk this way).
But my understanding is, it's part of the offering Israel E. makes to its investor: we target 15% return but with limited downside.
In effect the very strict loss they allow their PM to have almost follow rules you can find with most of the successful trader ie after x% you exit a losing trade.
You take multiple trades and with this risk cutting rule you end up with a skewed positive return profile.
Difference here is that the pod team "are the trade that can be cut".
My 2cts
You also get booted if you “go mild” as you say, and are seen not deploying risk. It just happens later vs sharp loss
Yeah PMs also have requirement on fund utilization rate
Continuing discussion along the control/economics/governance would be interesting. In any case, this is a great read for my students next academic year!
Enjoyed this thanks
Having worked at Citadel and spent 20yrs in Finance, this is an excellent piece.
🙏🏼