What to do with a profitable strategy?

[never2old]

Dr. quantprof, well done on the 20%/yr returns, still it's percentages - without knowing true returns, starting capital, re-invested or added capital.

forgive my bluntness, being old & eccentric I sometimes have to ask out of the box questions when I see folks asking for help.

in each section from your OP to the last post, I have a few observations & comments.

I’m hoping to get some advice here about where to go with my trading. I’ll keep this relatively brief. I have been trading profitably for 4 years. Annual returns have been 20%. I cannot lever the strategy further, since I already run into portfolio margin limits on a regular basis.

So what should I do, folks? How can I find someone who wants to do something with this strategy and not screw me over?

why would you need advice of any kind, especially if you are 20%/yr for 4 yrs with compounding that's just over a double of the original investment?

as for leverage, you haven't I don't believe mentioned %/breakdown of capital employed in each of 401k vs a non-401 k account & in the non-401K the % leverage are your getting?

I would like to do something more than just trade the small amount of money I have that is not in a 401K. I’m looking for some outfit to partner with. After some looking around, I have not found any natural fit in my area (Southern California)

when you say "looking around", can you be more specific what you mean, expand with details?

So what should I do, folks? How can I find someone who wants to do something with this strategy and not screw me over?

what type of partner(s) are you looking for - investor only money, shared equal active investor, or are you thinking you'd like to have a private equity investment set up that you run & operate, or are you playing with other peoples money for a promised certain return or HODL?

I have a PhD already. What I meant about the 401k is that my money is almost all in retirement accounts that cannot be traded the way that I trade.

20% per year is great, but it’s just been 4 years. Money only grows so fast, and ...

I only have so much time on this earth.

great consistent returns

all you basically need even with the small non-retirement account is find borrowed money/leverage, also known as other peoples money.

could be borrowed, margin, leverage...even OPM is all about their risk, not yours.

if you were to partner/invest with someone, what is your criteria?

tell me why I would partner with you & tell me my maximum risk?

on time - how much time or time horizon are you on about?

good luck to you

 

[never2old]

I’m hoping to get some advice here about where to go with my trading. I’ll keep this relatively brief. I have been trading profitably for 4 years. Annual returns have been 20%. Max drawdown is 2%. Average holding period is several days.

net returns that include success & failures that amount to an average 20%/yr even with 7 days trade swings is impressive.

how are your returns doing since the coronavirus hit the markets?

 

[never2old]

OP if you are as good as what you've posted, forget the investor/partner route - what about doing like many others have done, simply start a (there are no guarantees) fee for service advice, seminars, tutorials 'how to trade & make money' to publishing a book series.

 

[ironchef]

Thanks, for the encouragement, ironchef. But an IRA wouldn't work because I go short a lot. I will just have to keep growing the money I have unless something else comes along.

Easy. You go short by buying put options on the underlying.

 

[cruisecontrol]

I'm thinking about how I would value this strategy as a potential buyer. What is an appropriate P/E ratio of a trading strategy?

First of all I would require an audited track record, obviously. Without this there is nothing.

Without knowing how it works, the estimated amount of capacity is nearly worthless, and would be highly discounted towards the actual capacity used in the track record.

If the strategy isn't basically 100% automated, the value is zero because how do I know that all the value isn't created by your discretionary decisions. I would ask to see all the source code for your system other than the edge itself, to get confidence of it being legit.

I would examine the PnL curve and compare it to well known indexes to look for any obvious correlations. e.g. if the performance appears related to VIX I would have to discount the average level of VIX over the track record.

I would assume the edge has a half-life of 3.5 years as based on my experience the market gets ruthlessly more efficient over time for systematic strategies. After 3.5 years the 20%/year/10 sortino will become 10%/year with 5 sortino, at which point it is borderline dead (I wouldn't trade less than 5 sortino). The geometric average rate of return is about 14.4% over the 3.5 years of tradability.

One way to express the value (price) of the system to the buyer is as a function of the capacity and desired annualized ROI over the 3.5 years

(annual ROI)^3.5 = ((1.144^3.5*capacity-price)/(capacity+price))

e.g. if I want a 10% annualized ROI (seems fair?) and the capacity is 1 million, then I can only pay $86k for the system. It's linear so if the capacity is 10 million then it's worth $860k to me, except I don't have 10 million to invest in it.

Personally I make >30% average ROI on my own trading, so it probably don't make sense for me to buy it at any price. You need to find someone who is simultaneously versed enough in this stuff to understand it, has no better opportunities, and has enough capital to max out the capacity that they believe it has. That or a sucker. It also occurs to me that nothing stops you from selling it to multiple people, overselling the actual capacity which is another risk I undertake as a buyer.

So after all that thought, selling the system would seem to be, unfortunately, a nearly infeasible proposition.

 

[1957may10]

I'm thinking about how I would value this strategy as a potential buyer. What is an appropriate P/E ratio of a trading strategy?

First of all I would require an audited track record, obviously. Without this there is nothing.

Without knowing how it works, the estimated amount of capacity is nearly worthless, and would be highly discounted towards the actual capacity used in the track record.

If the strategy isn't basically 100% automated, the value is zero because how do I know that all the value isn't created by your discretionary decisions. I would ask to see all the source code for your system other than the edge itself, to get confidence of it being legit.

I would examine the PnL curve and compare it to well known indexes to look for any obvious correlations. e.g. if the performance appears related to VIX I would have to discount the average level of VIX over the track record.

I would assume the edge has a half-life of 3.5 years as based on my experience the market gets ruthlessly more efficient over time for systematic strategies. After 3.5 years the 20%/year/10 sortino will become 10%/year with 5 sortino, at which point it is borderline dead (I wouldn't trade less than 5 sortino). The geometric average rate of return is about 14.4% over the 3.5 years of tradability.

One way to express the value (price) of the system to the buyer is as a function of the capacity and desired annualized ROI over the 3.5 years

(annual ROI)^3.5 = ((1.144^3.5*capacity-price)/(capacity+price))

e.g. if I want a 10% annualized ROI (seems fair?) and the capacity is 1 million, then I can only pay $86k for the system. It's linear so if the capacity is 10 million then it's worth $860k to me, except I don't have 10 million to invest in it.

Personally I make >30% average ROI on my own trading, so it probably don't make sense for me to buy it at any price. You need to find someone who is simultaneously versed enough in this stuff to understand it, has no better opportunities, and has enough capital to max out the capacity that they believe it has. That or a sucker. It also occurs to me that nothing stops you from selling it to multiple people, overselling the actual capacity which is another risk I undertake as a buyer.

So after all that thought, selling the system would seem to be, unfortunately, a nearly infeasible proposition.

I’m looking to quit my day trade job , will miss it...
However does anybody have any idea how to invest my money for 10% per year.
I have some but maybe it’s better options out there....

 

[never2old]

I’m looking to quit my day trade job , will miss it...
However does anybody have any idea how to invest my money for 10% per year.
I have some but maybe it’s better options out there....

a shared knowledge base thread, I like, all we need is the specifics.

@crusiecontrol & quantprof claim better than 10% ... I wonder, need the posted details/specifics

I'm guessing you mean 10% safe & secure, what would be your +/- risk on the capital?

factoring in a market correction of the last 6 weeks, I say its possible to get 10%/yr 99% guaranteed.

where or in what would invest in to get 10% year over year?

 

[1957may10]

a shared knowledge base thread, I like, all we need is the specifics.

@crusiecontrol & quantprof claim better than 10% ... I wonder, need the posted details/specifics

I'm guessing you mean 10% safe & secure, what would be your +/- risk on the capital?

factoring in a market correction of the last 6 weeks, I say its possible to get 10%/yr 99% guaranteed.

where or in what would invest in to get 10% year over year?

Almost right, however not exactly what I’m looking. I’m getting good returns, but I’m trading.
At some point I want to quit. I have some ideas, but maybe some better ones.

 

[quantprof]

why would you need advice of any kind, especially if you are 20%/yr for 4 yrs with compounding that's just over a double of the original investment?

I guess I'm just impatient. And as cruisecontrol mentioned, these things don't last forever. Thus, I am trying to figure out what I can do with the strategy now.

when you say "looking around", can you be more specific what you mean, expand with details?

Basically, I have not been able to locate any quant hedge funds in my area that would likely go for this type of strategy.

what type of partner(s) are you looking for - investor only money, shared equal active investor, or are you thinking you'd like to have a private equity investment set up that you run & operate, or are you playing with other peoples money for a promised certain return or HODL?

I don't really know. In essence, that was the question.

And returns over the last two months have been good.

 

[quantprof]

So after all that thought, selling the system would seem to be, unfortunately, a nearly infeasible proposition.

Well, you're not exactly my target audience with 30% annual returns already. But I acknowledge all your points. I don't think that selling the strategy is workable.