Inside the Secret World of Prop Traders | Noel Smith of Convex Asset Management
Monetary Matters with Jack Farley
Deep Dive
Why is the prop trading world often a black box in terms of strategies and performance?
Prop traders generally don't raise outside money, which means they have no need to disclose their strategies or performance to the public. This lack of transparency keeps their methods and high returns hidden from the broader investment community.
Why did Noel Smith decide to move from prop trading to managing a hedge fund?
Noel Smith saw the potential for greater scalability and impact by managing a hedge fund. He believed that making a percentage of much larger sums of money could be more rewarding than keeping all the profits from smaller, prop-level trades. He also wanted to be more transparent and publicly accountable.
Why is capital raising for a hedge fund more challenging than Noel Smith anticipated?
Capital raising is incredibly difficult and often more about relationships and likability than pure performance. Unlike prop trading, where returns speak for themselves, hedge funds require building trust and rapport with potential investors, many of whom have different criteria and may prefer established names or smoother performance records.
How does Convex Asset Management differentiate itself from traditional hedge funds?
Convex Asset Management brings best practices from prop trading into a hedge fund format, offering unique strategies that are not commonly seen in the hedge fund world. This differentiation is both a strength and a challenge, as it can be difficult for investors to understand but offers the potential for higher returns.
Why does Noel Smith rank relationships and likability higher than performance when it comes to hedge fund success?
In the hedge fund world, the gestation period for building trust and getting allocations can take years. Relationships and likability are crucial because they help in building the necessary rapport with potential investors who often prefer to work with people they know and trust, rather than just looking at performance numbers.
What is the average sales cycle for getting a significant investment in Convex Asset Management?
The sales cycle for significant investments, especially from institutional investors, can take no less than a year, and often more like two. This is because institutional investors need to go through multiple layers of decision-making and due diligence processes.
Why did Convex Asset Management exclude March and April 2020 from their track record?
Convex excluded March and April 2020 to avoid misleading investors. The returns during that period were exceptionally high due to the unique circumstances of the COVID-19 pandemic, and they believed that including these outliers would not be representative of their typical performance and could set unrealistic expectations for the future.
What is the long-term vision for Convex Asset Management?
The long-term vision for Convex is to build a successful, scalable hedge fund that can manage a few hundred million in actual invested capital before seeing significant alpha degradation. Noel Smith also aims to develop a holistic business that touches various aspects of the investment and trading landscape, leveraging his extensive experience and network.
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