Thread by @mikeharrisNY

🧵The advantages of retail and large AUM funds over small funds.

1. Large AUM funds move the markets. If they even face 20% - 50% redemptions during that doesn't affect them much. They can always use their huge marketing and PR departments to make it back when markets recover.

2. Large AUM is an edge. Many market participants fail to understand this. Large funds can invalidate technical and fundamentals any time they want. But they are careful and focus on the longer-term.

3. On the other hand retail has many advantages most don't realize or exploit. After a 20% drawdown no one will call a retail trader in the middle of the nigh and ask for emergency meeting. Retail has freedom of movement. Freedom is also an edge of some kind.

4. Small funds and especially strategic allocators are at a disadvantage. Redemptions can push AUM below threshold for attracting more capital. They are always under pressure to deliver nearly every quarter. Most avoid timing with excuses because it has a bad name.

5. In March 2008, stocks, bonds and commodities fell and some funds faced large drawdown. The models based on correlations broke down. Leveraged small funds were closed. I remember someone I knew who managed a $100mm funds ended up DJ in a club.

6. Retail traders have the major advantage of freedom but most focus on what fund managers are doing instead of developing their own timing strategies. Timing if done right can result in benefitting from the losses of small funds that have no maneuvering ability.

7. Small funds may be stuck with inflexible math models for allocations based on parameters that are stochastic and during market crashes are basically noise. Backtests work fine due to data snooping: they want select the model that failed but the one that worked well in past.

8. At the end of the day, passive investors, large AUM funds and those retail traders who do their homework (not easy) are the beneficiaries from the losses of a large number of aspiring fund managers relying on basically academic models and backtests. Have a good weekend!