This has to be among the top 5 questions I’ve received over the years.

Continual improvement is the name of the game, but to improve, you first need an objective way to measure performance.

So as a retail trader, is there a professional benchmark, against which you can measure your trading performance?

I have to stress the word “professional,” since the internet is saturated with claims of absurd returns with minimal risk. Talk is cheap, so let’s find some professionals with track records.

The Barclay Hedge Fund Index may offer some clues.

What’s the Barclay Hedge Fund Index?

You can check it out here. Performance from 2019-2023 is shown below.

In essence, the BHFI measures, on a monthly basis, the average return of all hedge funds in the Barclay database. The index is the arithmetic average of the net returns of the funds reporting that month.

I don’t know the exact composition of the index, or how the number of funds has varied over the years. But in June 2023, there were 3200 funds reporting, so the figures should be fairly reliable.

Historical data is provided from January 1997 onwards.

Starting with an initial $10000 investment in 1997, here’s how the equity curve looks until 2022.

That’s a pretty good looking equity curve, with a clear uptrend and few deep drawdowns.

Key Performance Statistics

• Total return of 571% over 26 years
• CAGR is 7.60%
• Max drawdown of 24.1% in Feb 2009, towards the end of the Great Financial Crisis
• Max stagnation of 2 years 11 months, during the aforementioned GFC period

I’m sure some of you would consider a 7.6% CAGR to be a miserable rate of return, especially in this day and age where a 100% annual return seems to be the benchmark thrown around in online trading circles.

Some Considerations

1. Long-term Average

The 7.60% CAGR applies to a large number of reporting funds over a 26-year period.

Over that long period, there would have been:

• Good and bad funds
• Good and bad years
• Good and bad market conditions

Achieving a long track record like this sure isn’t easy. 7.60% isn’t as low as it seems.

Amateurs aim for perfection, professionals aim for consistency.

2. Survivorship Bias

Like the stock indices, there is probably some survivorship bias at play here.

The constituent hedge funds generally tend to be the more successful ones. Weaker hedge funds would have gone bust, or refused to disclose their returns.

Adjusting for this bias, actual returns would likely be slightly more conservative.

3. Hedge Fund Constraints

Some funds are subject to certain trading mandates, whereby the manager has to trade a certain group of markets, or maintain a minimum trading frequency, even during unfavorable market conditions.

Larger funds that transact larger lot sizes also may experience liquidity issues and consequent execution delays and/or increased transaction costs.

Retails traders have far more freedom in this respect, although this needs to be reigned in with discipline.

So What’s Good Trading Performance?

Retail traders operate under different conditions, so a direct comparison isn’t easy.

In his bestselling trading book “Advanced Techniques in Day Trading, ” full-time stock trader Andrew Aziz mentioned that the best stock swing traders can expect to earn 15-20% annually.

I’m a swing trader and mid-term trend follower, so I will speak from that standpoint. All things considered, I estimate that a CAGR of 15%, with a maximum drawdown of no more than 20%, over at least a 5-year period is a good target.

I’m sure there are some who can easily exceed these benchmarks, especially day traders. More power to you if you can master that game. But considering that many brokers openly disclose that 80-90% of retail traders actually lose money (and remember these brokers are actively courting your money), I think the figures above are nothing to sneeze at.

Higher returns are definitely possible if you ramp up your position sizing, but drawdowns will increase accordingly.

So tune out the vast amounts of noise over the internet, or the book titles that say how the author makes $5000 with just 5 minutes a day. If it were that easy, everyone would be doing it!

Keeping realistic expectations and managing your risk is the way to go.