Obtaining Trading Capital
- Thread starter Cole
- Start date
I fournd myself in the same situation a year ago. I had written a handful of systems that trade 40 futures markets with identical parameters and settings. The systems were profitable for all values of their parameters and had been developed on 80s data and walked forward on 90s and 00s. Commissions and very conservative market-specific slippage assumptions were included. Hypothetical returns were reasonable and realistic, as were drawdowns and volatility. Sounds great (and familiar), doesn't it? Well...
The problem: Each system required about $1 million in equity in order to function properly.
The solution: I became a CTA.
There were typically two responses to my initial fundraising efforts:
1. Get the hell out of my office.
2. (Much more more common) "Sounds great. You've clearly done your homework and know what you're talking about. We have no doubt you will be successful. Come back when you have an X month track record." X is typically 6, 12, or 36 months.
It became clear that I was going to need to figure out a way to generate some kind of track record, so put together a mailing list and began emailing my signals for two systems in real-time (weekly) to the list. Between 9/26/2003 and 2/6/2004, these signals generated a net return of 32% for one system and 66% for the other, with no compounding and a targeted 25% annualized volatility.
Around the same time, I entered the RQSI CTA Star Search trading competition, which is designed to be less a trading competition and more a way for them to find new CTAs for their Emerging CTA Index fund. There is a volatility requirement, maximum initial drawdown, maximum peak-to-valley drawdown, and no reinvestment. Even better, they fund each participant with a real-money $100k account. So win, lose, or draw, I knew that at the end of the quarter I would have a 3 month track record and at the end of six months I would have a 6 month track record, even if it was with a suboptimal amount of capital. This would satisfy the requirements of many of the potential investors to whom I had been speaking.
Well, the last six months just happened to be well-suited to my trading style and I was fortunate enough to place 1st of the 50 competitors in the 3Q2003 competition and 3rd of the 53 competitors in the 1Q2004 competition. Even more important, I had not only generated the required 6 month track record, but had beaten the hypothetical results for the same period by a small amount (due to less than expected slippage).
So, I went back to all of the people who said "come back after X months" with X<=6. To make a (very) long story short, the CTA now has a significant amount of capital (>10m) under management.
The point? It can be done. Sit down and figure out where you are and where you want to be. Figure out what's standing between the two and behave in such a way as to remove the obstacles.
I would advise you to do the following:
- Forget about "illustrating the power" of your systems and focus on presenting a coherent trading program, with realistic leverage and volatility.
- The returns you present are simply not credible and anyone with any kind of sophistication will take one look at 250% CAGR and immediately throw you out of their office.
- Remove all compounding from your hypothetical returns, as compounding distorts them significantly.
- Forget about what you consider to be "mathematically correct" and present your program the way people are used to seeing them. For example, express your slippage assumptions in dollars and be prepared to present daily returns.
- Learn about and be prepared to discuss things like annualized volatility and margin/equity ratio.
- Prepare a concise "information packet" that describes your methodology and presents your hypotheticals clearly and with as little bias as possible.
- DO NOT EVER disclose your system. If anyone asks you to, politely thank them for your time and walk away. The VAST majority of serious investors couldn't care less about the specifics of your systems. Most actively discourage any discussion of the actual techniques you use. They don't care and they don't want to know. All they care about is your ability to convert your hypotheticals into real results.
- Ignore those who tell you that you will not succeed and assure you that you are silly for even trying. The closer you come to achieving your goal, the louder and more insistent they will get. Don't argue with them, but by all means thank them for their genuine concern and for taking the time to express it. Then move on.
This may sound harsh, but they reflect the real, hard-earned experiences of someone who has walked the path from hypotheticals to actuals.
I apologize to all for the long post. I don't post very often, but I thought that my experiences would be helpful to the thread originator and would be appropriate to share here.
jj
The problem: Each system required about $1 million in equity in order to function properly.
The solution: I became a CTA.
There were typically two responses to my initial fundraising efforts:
1. Get the hell out of my office.
2. (Much more more common) "Sounds great. You've clearly done your homework and know what you're talking about. We have no doubt you will be successful. Come back when you have an X month track record." X is typically 6, 12, or 36 months.
It became clear that I was going to need to figure out a way to generate some kind of track record, so put together a mailing list and began emailing my signals for two systems in real-time (weekly) to the list. Between 9/26/2003 and 2/6/2004, these signals generated a net return of 32% for one system and 66% for the other, with no compounding and a targeted 25% annualized volatility.
Around the same time, I entered the RQSI CTA Star Search trading competition, which is designed to be less a trading competition and more a way for them to find new CTAs for their Emerging CTA Index fund. There is a volatility requirement, maximum initial drawdown, maximum peak-to-valley drawdown, and no reinvestment. Even better, they fund each participant with a real-money $100k account. So win, lose, or draw, I knew that at the end of the quarter I would have a 3 month track record and at the end of six months I would have a 6 month track record, even if it was with a suboptimal amount of capital. This would satisfy the requirements of many of the potential investors to whom I had been speaking.
Well, the last six months just happened to be well-suited to my trading style and I was fortunate enough to place 1st of the 50 competitors in the 3Q2003 competition and 3rd of the 53 competitors in the 1Q2004 competition. Even more important, I had not only generated the required 6 month track record, but had beaten the hypothetical results for the same period by a small amount (due to less than expected slippage).
So, I went back to all of the people who said "come back after X months" with X<=6. To make a (very) long story short, the CTA now has a significant amount of capital (>10m) under management.
The point? It can be done. Sit down and figure out where you are and where you want to be. Figure out what's standing between the two and behave in such a way as to remove the obstacles.
I would advise you to do the following:
- Forget about "illustrating the power" of your systems and focus on presenting a coherent trading program, with realistic leverage and volatility.
- The returns you present are simply not credible and anyone with any kind of sophistication will take one look at 250% CAGR and immediately throw you out of their office.
- Remove all compounding from your hypothetical returns, as compounding distorts them significantly.
- Forget about what you consider to be "mathematically correct" and present your program the way people are used to seeing them. For example, express your slippage assumptions in dollars and be prepared to present daily returns.
- Learn about and be prepared to discuss things like annualized volatility and margin/equity ratio.
- Prepare a concise "information packet" that describes your methodology and presents your hypotheticals clearly and with as little bias as possible.
- DO NOT EVER disclose your system. If anyone asks you to, politely thank them for your time and walk away. The VAST majority of serious investors couldn't care less about the specifics of your systems. Most actively discourage any discussion of the actual techniques you use. They don't care and they don't want to know. All they care about is your ability to convert your hypotheticals into real results.
- Ignore those who tell you that you will not succeed and assure you that you are silly for even trying. The closer you come to achieving your goal, the louder and more insistent they will get. Don't argue with them, but by all means thank them for their genuine concern and for taking the time to express it. Then move on.
This may sound harsh, but they reflect the real, hard-earned experiences of someone who has walked the path from hypotheticals to actuals.
I apologize to all for the long post. I don't post very often, but I thought that my experiences would be helpful to the thread originator and would be appropriate to share here.
jj
How does the system execute - is it fully automated, or is there a human input requirement. Of this requirement, is any judgement left to the human?
Congratulations. As I said it is only the person that is concerned that knows if he will able to compete or not. If you know what you and your system objectively is really capable of without cheating with yourself and of course with others then it's not really a problem. Now there are several segments of performance. If you have a daytrading system that performs let's say 500% per year which is among the top and you go and see investors accustomed to higher trading scale with 20-50% return you will be taken as a clown so it's better to deal with professionals who are accustomed with the same scale of trading. Also it's better to largely underestimate the performance and above all be sure of the consistency (in fact It is doubtfull with all stochastic systems). If 500% is not consistent it's idiot to claim such a number. In fact even if you were sure of the consistency it's better to divide it by 2 at least so that the surprise can only be on the good side. In fact for me when talking about performance I'm laughing when I read UP TO XX% because there is no limit then why not claim "up to 100000%" then ? So for me a performance should be the MINIMUM EXPECTED. Expected means statistically so there is still a possibilty that it is not done one particular year but on average it would be the minimum return per year.
And to your list celow I would add that there must be two perf: one without money management and another one with money management because if only perf with money management is presented then it's impossible to separate the two part of the system and estimate the part due to chance. And by money management I mean in the sense of bet size optimisation not in the sense of risk management.
Also the drawdown is extremely important. Some people consider that it is not important but I consider that drawdown is part of the risk above all if you use OPM (Others People Money). Now personally I hate to trade with OPM. And I will never confy my money either except to guys I would have formed and tested myself
.
And to your list celow I would add that there must be two perf: one without money management and another one with money management because if only perf with money management is presented then it's impossible to separate the two part of the system and estimate the part due to chance. And by money management I mean in the sense of bet size optimisation not in the sense of risk management.
Also the drawdown is extremely important. Some people consider that it is not important but I consider that drawdown is part of the risk above all if you use OPM (Others People Money). Now personally I hate to trade with OPM. And I will never confy my money either except to guys I would have formed and tested myself
.$10/round-turnQuote from DT-waw:
They charge $10 commissions plus exch fees. Is it per side or round turn figure? TradePipe thinks this kind of information is not important to present on their website
jj
Thanks to John Joseph for the excellent advice.
I understand how a 250% return looks unreasonable, but this is a reasonable computation based on the number of betting opportunities arise from a combination of short term through longer term trading systems.
By reducing betsize and leverage, I can lower returns to under 75% and drawdowns under 20%.
Thanks again for the much appreciated help.
Any ideas on futures prop firms that might be interested? Don Bright only trades listed securities.
Cole
I understand how a 250% return looks unreasonable, but this is a reasonable computation based on the number of betting opportunities arise from a combination of short term through longer term trading systems.
By reducing betsize and leverage, I can lower returns to under 75% and drawdowns under 20%.
Thanks again for the much appreciated help.
Any ideas on futures prop firms that might be interested? Don Bright only trades listed securities.
Cole