Finding a home for my equity quant strategy
I worked on the sell side for 10+ years, mainly in equities. I have been working with a brilliant artificial intelligence researcher who has developed a group of quant strategies that have excellent performance and characteristics. We have spent an enormous amount of effort to benchmark and evaluate each strategy, and we now feel very confident that we have something to move forward with. I know that there are a lot of quant strategies out there that have been developed in people's garages that look ok or like they might survive, but this is well beyond that. The strategies are primarily for US equities, but initial analysis shows that global equities will work as well. We have not traded the strategies yet, but have numerous negative assumptions built in to our back testing to cover unknowns (slippage, add/take rebate/fee, market impact, etc.). We have also run the strategy from 2000 to the present, and yes, we have avoided things like fitting.
We would like to partner with an existing hedge fund to hit the ground running, rather than building everything from scratch (AUM, technology platform, etc.). How likely is it that a hedge fund would talk to us? And would a multi-strategy hedge fund consider us? I do have some contacts, but didn't want to ask without having some idea of what is possible.
Additionally, any thoughts on what terms might look like would be appreciated. Thanks
yes, if its as good as you said it is.. go to any multi manager and they will seed you.
they might start you off small, but as soon your invention printing money in a scalable way, they will throw money at it. you will go from 100mm to 500mm within 18months.
for lot of these MM platform and for many other places, they can always lever up couple more bps... so the time it takes you go from 100mm -> 500mm -> 1bn is very short.. you are not waiting for fundraising to come through. they would lever up their existing AUM first and then go and tap the market if they need to...
Thanks for the info!
Do you happen to know what sort of support they offer in terms of OMS, tick data, etc?
Izzy englander's Millenium fund does this.
Do you have a track record of running your strategy on real money? Some funds won't even consider you without that.
Two big questions: What is your Sharpe and maximum peak to trough drawdown? How scalable is your strategy i.e. does p/l start diminishing at $250mm or can it handle $1bn+?
You will have a much easier time if you establish revenue, you will be able to get funding on proof of concept alone but that will be discounted. If you truly have a strategy that will work, do the ground work yourself. You will be paid 50x if you have a proven strategy and can market to the big players by providing a legitimate means to generate alpha.
Curious -- you said you haven't started trading with the algorithm yet. Why not? If you're as confident in this algorithm as you say, then why aren't you using it to trade your personal account? (After working "10+ years on the sell-side", I assume you must have some money saved up.) Even if your account has only 10 or 20 grand, start running your algo so you can include your broker statements in your presentation to hedge funds and prove you really do believe in it. (Plus you'll earn some money in the meantime).
Being able to say "This is not just theory, I believe in this so much that I've been using it for my own personal account the past six months, and here are the broker statements proving I'm profitable" goes a long way when you're meeting an investor and asking for money...
This. Lot of people think they've found the perfect algorithm when they back test, but once they get into the market they realize things don't work like a controlled test. I can tell you that we would rarely fund someone with no track record and seeding without experience would be just as unlikely. Not saying it's impossible, but you'll have a much better chance of finding a seed funder with a track record.
Thanks everyone for your feedback and advice.
I agree that having some sort of track record would be optimal for marketing the strategy, but my strategist is very concerned about trading the strategy with a single broker that will have all of the orders to analyze. I know that this sounds a bit over the top, but he has worked on this for a long time and believes that he has something that is worth protecting, even if it is heavy handed. There are various ways of dealing with his concern with the proper resources, but right now it would be difficult and costly.
I like the comment about selling "research skills" beyond the strategy, I think that that is excellent advice and is something that we will certainly be doing. The strategist has developed multiple strategies that have potential across multiple asset classes so the the plan is to sell not only the single strategy, but his research skills as well.
I'd kind of like to build a hedge fund around him from scratch, in part because I have contacts for fund raising, but his preference is to partner with an existing firm that will allow him to hit the ground running. If no suitable partner is found then we will probably launch a new fund. I hope that we will be able to get people to talk to us based on his AI credentials and the performance characteristics of this particular strategy.
BTW, one piece of advice (I used to work at two different automated trading shops) -- even if you algo is as good as you say, once you deploy it with a significant amount of capital, be prepared for it to stop working after 6 months to a year. Automated strategies always need to be replaced about that often as the rest of the market figures out what you're doing and the trade becomes too crowded to make money. (Other researchers figure out the same idea, other HFTs notice your trades are moving the market and investigate why, your coworkers leave the company and steal the idea, etc). So once you throw more than a couple hundred million dollars at the strategy, it will gradually stop working. That doesn't mean you're out of business after 6 months, it just means you're constantly on the hook to keep evaluating your strategies and refining/replacing them with new ideas. So don't think of this as "I'm selling a great trading strategy", think of it as "I'm selling the research skills of myself and my partner to come up with new strategies each year".
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