> "We have a fancy trading algorithm that statistically is never going to outperform just buying VOO and holding it, but the thing is if you get lucky, it could".
You wish lol. How do you think they pay for all the developers?
Firms like HRT don't even take outsider money, they don't really need to.
And besides, we don't get paid for beating stocks, a lot of funds will do worse than equities in a good year for the latter, the whole point is that you're benchmarked to the risk free rate because your skill is in making money while being overall market neutral. So you rarely take a drawdown anywhere near as badly as equities.
As a service this is often a portfolio diversification tool for large allocators rather than something they put all the money into.
It is true however that some firms are basically just rubbish beta vehicles that probably should in an ideal world shut down.
I don't know what you define as outsider money, but the fact is that they are a market maker, and you are never going to make large amounts of money on arbitrage by itself.
Two business models:
Good returns - take other peoples money, trade it, take 20% of profits
Excellent returns - trade your own money, make a bit less overall but keep 100% of profits
If the first case, whats the incentive for users to trade with you
In the second case, why start a company?
Not sure what you mean
Prop shops usually come about as the partners buy out other investors in a fund