Determining what a trading system is worth

T

thunderbolttr

I was wondering if valuing a trading system is highly subjective or if there are objective valuation techniques commonly used in the industry for determining how much to sell or buy a trading system for.

For those who have had experience with developing and selling a highly-effective trading system to a single trader or firm, what factors did you use to figure out what to set your asking price at?

For those who have purchased a trading system before (or who have considered doing so), what considerations were important in your decision to pay what you did? For example, how important to you was the sharpe ratio, maximum drawdown, how many different/extreme market conditions were present during the testing period, the duration of the testing period, back-testing vs. forward-testing vs. a live track record, whether or not you had to sign a nondisclosure agreement, etc.?

Thanks for your help.
 
There are no rules. It depends on the system and the parties involved.

We considered literaly thousands of systems and we only bought a handful.

For institutional investors (as far as we are concerned) the most important characteristic of a system is its consistency. The profit factor needs to show stationarity over several decades.
Profit (risk-adjusted) doesn't matter much. An extremely consistent system with a modest Sharpe ratio (around 1) can find its way into one of our products.

I you're willing to disclose your system's characteristics here or in PM I can tell you what you need to work on.

Ninna
 
Quote from nLepwa:

For institutional investors (as far as we are concerned) the most important characteristic of a system is its consistency. The profit factor needs to show stationarity over several decades.
Profit (risk-adjusted) doesn't matter much. An extremely consistent system with a modest Sharpe ratio (around 1) can find its way into one of our products.
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+1
 
It's an active trading system that I've been forward-testing for the last 31 months. The main advantages are the profit factor, sharpe ratio, and maximum drawdown. Overall it has averaged about 30% profit per month with an annualized sharpe ratio of 6.75 (or if looked at on a daily basis, over 1.5% profit per day with a sharpe ratio of 10.53) and a maximum drawdown of -7.1%. In bullish periods it averages closer to 10%-20% per month, and in bearish periods it averages closer to 20% to 40% per month.

The biggest disadvantage is that it has very limited scalability under certain market conditions (it could probably just handle $200,000 well in those market conditions), so it would probably only appeal to very small hedge funds, individual retail traders, or individual retail investors looking to complement longer-term holds with a strategy that performs exceptionally well in bear markets in particular.

Another disadvantage is that I haven't yet back-tested it before May 2008, though there has been a nice range of very different market conditions from mid-2008 until now. It has held up well with just one losing month so far (a break-even month that turned negative after commissions).

Any thoughts?
 
Quote from Now is Now:

What is the commodity and what is the contract ratio to capital ?

NiN
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It's just equities - primarily those with a market cap between $500 million and $3 billion. The contract ratio would be zero because it doesn't involve any contracts.
 
Quote from thunderbolttr:

It's an active trading system that I've been forward-testing for the last 31 months. The main advantages are the profit factor, sharpe ratio, and maximum drawdown. Overall it has averaged about 30% profit per month with an annualized sharpe ratio of 6.75 (or if looked at on a daily basis, over 1.5% profit per day with a sharpe ratio of 10.53) and a maximum drawdown of -7.1%. In bullish periods it averages closer to 10%-20% per month, and in bearish periods it averages closer to 20% to 40% per month.

The biggest disadvantage is that it has very limited scalability under certain market conditions (it could probably just handle $200,000 well in those market conditions), so it would probably only appeal to very small hedge funds, individual retail traders, or individual retail investors looking to complement longer-term holds with a strategy that performs exceptionally well in bear markets in particular.

Another disadvantage is that I haven't yet back-tested it before May 2008, though there has been a nice range of very different market conditions from mid-2008 until now. It has held up well with just one losing month so far (a break-even month that turned negative after commissions).

Any thoughts?
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If you had started trading it with just $59, thirty one months ago, you would already be over your $200K limit (under certain market conditions). Why would you be looking to sell such a strategy rather than just trading it?
 
Quote from nLepwa:

An extremely consistent system with a modest Sharpe ratio (around 1) can find its way into one of our products.


Ninna
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Our products:confused: Are you sure? If you get the money, I got the tools.
 
Quote from thunderbolttr:

I was wondering if valuing a trading system is highly subjective or if there are objective valuation techniques commonly used in the industry for determining how much to sell or buy a trading system for.

For those who have had experience with developing and selling a highly-effective trading system to a single trader or firm, what factors did you use to figure out what to set your asking price at?

For those who have purchased a trading system before (or who have considered doing so), what considerations were important in your decision to pay what you did? For example, how important to you was the sharpe ratio, maximum drawdown, how many different/extreme market conditions were present during the testing period, the duration of the testing period, back-testing vs. forward-testing vs. a live track record, whether or not you had to sign a nondisclosure agreement, etc.?

Thanks for your help.
More...

Read the title of thread, but not your post. My answer is simple:

Value of a trading system is < 0.
 
Can you just cannibalize its signals until the scalability increases?

If you can't, than stop using it.

By cannibalizing I mean - simplify the signals until you start getting better scalability while maintaining a decent and tangible risk/reward.

If you study business books (or run a small business and have gained a bit of insight) you'll find most small businesspeople don't own businesses, they own jobs. Just make sure you're not one of them. i.e Is your system only going to provide you with a job, or does it have the properties of a real business. Sounds simple and irrelevant, but its a big lesson and a big hurdle for people in business. Trading and systems trading is no different.
 
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