What to do with a profitable strategy?

quantprof said:
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.
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Well, I was really considering it seriously, otherwise I wouldn't have taken the time. You do sound legit just based on how you describe it :) Even if my returns are higher, there could be some forms of synergy with my edges, and some intangible value to your methods if I am able to improve them further. Unfortunately, in addition to all the issues that came to mind, your estimate for the capacity seems to be very high which will naturally lead you to a valuation that is at least an order of magnitude more than would make sense for me, and probably most people on this board.

I am sympathetic to your situation, since in the past I was also extremely undercapitalized and unsure how to really exploit my edge. After trying a bit, a couple other things did come to mind:

1) The fact that you are on a short time horizon actually decreases the concerns about the edge being stolen or diluted. It takes time for the information leakage to eat away your capacity. Additionally you have a FT job that you don't even want to quit. This edge is not your lifeblood like it is for a lot of us traders, so you can afford to take a little risk with it.

2) You have a PhD, which I believe means it is probably not that hard for you to hired by a hedge fund as a researcher. You might be able to negotate some amount of compensation linked to the alpha your ideas generate. The potential compensation will obviously be much lower than trading OPM, but it's potentially a lot easier to realize. Not very sure how realistic this is as I have no connections to the industry, but perhaps worth investigating.
 
cruisecontrol said:
Personally I make >30% average ROI on my own trading
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well done, extremely well done..

if you'd kindly respond to providing a little more information, just a wee bit?

not the specifics or the trades, just what is that you are you trading to get 30% - is it commodities, equities, options, futures, crypto, Bitcoin, sports betting, a mix of everything or other?

Thanks
 
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never2old said:
well done, extremely well done..

if you'd kindly respond to providing a little more information, just a wee bit?

not the specifics or the trades, just what is that you are you trading to get 30% - is it commodities, equities, options, futures, crypto, Bitcoin, sports betting, a mix of everything or other?

Thanks
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Equities only. 100% automated. Always hedged, so all my returns are pure alpha. Not going reveal any edges for obvious reasons, but I can tell you my general framework for trading equities was heavily influened by Ed Thorp's statarb series, which you can find here: http://www.ntuzov.com/Nik_Site/Niks_files/Research/papers/stat_arb/. Thorp_part1.pdf, Thorp_part2.pdf etc. Hands down the most helpful information I ever found on the internet as an aspiring quant trader.
 
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cruisecontrol said:
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.
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If comments would get awards...
 
@cruisecontrol .... thanks, already finished reading the 6 pdf 12 pages.

time stamped, I wonder how he would survive today with almost zero % T bills when he was getting 7% way back when?

all the same an interesting read & interest guy.

my outtake, the success might be in leverage & hedging ... but who knows if the average trader understands or even uses those strategies.

what I got from the read was the 2.5% of portfolio in any one long & 1.5% in short.
 
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never2old said:
@cruisecontrol .... thanks, already finished reading the 6 pdf 12 pages.

time stamped, I wonder how he would survive today with almost zero T bills?

all the same an interesting read & interest guy.

my outtake, the success might be in leverage & hedging ... but who knows if the average trader understands or even uses those strategies.
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Well, the tbills were only ever a small part of it, the returns were mostly alpha. Hedging is definitely super important though. The framework for trading and risk control that he describes is very similar to what I'm using today, what is changed is the prediction models / edges. Liquidity takers get smarter and smarter over time, once they figure out they are systematically paying for something, that will get added to their trading models and the edge will die.
 
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