Selling an algorithm to hedge funds?
This question is on behalf of my friend.
My friend is at university and is part of a hedge fund startup that has raised £5m in capital.
The hedge fund consists of phd students. They have developed an algorithm.
This algorithm has got the seal of approval from professors including a Nobel laureate.
They have priced the algorithm in the region of 10's of millions and they want to sell it to a hedge fund.
My friend gets a reasonable cut, in the regions of millions, if the algorithm gets sold.
How likely is it he will be able to sell the algorithm?
Would hedge funds or Asset Management be interested in this?
Based on the information provided, the answer is "not very likely". That said, everything depends on the specifics.
I feel like there's a missing piece to this story. Why wouldn't they trade with it?
They want to sell it to raise capital but they will also use it themselves.
They're going to sell it to someone but retain the rights to use it themselves?
I'd build a track record and try to raise my own AUM.
I've never heard of something like that happening. How would you sell something that the customer can't understand or test out, and if they could, then they could probably reverse engineer it
I feel like a licensing deal would be the only thing on the table. Even if you've validated it to some extent, we all know the future is unpredictable. I'm not sure how you get to millions in value unless it's literally thousands of manhours of development wrapped in a nice analytics UI or something.
Normally when you develop an algorithm that generates above average market returns, you use it to actually trade and make money. Given the state of things as you've described, I would be willing to bet my bonus from this year and the next that your buddy will never a penny from the sale of said algorithm.
One thing that academic algorithm researchers almost NEVER take properly into account is transaction costs. Sure you might be able to find all sorts of useful signals that could generate alpha in theory. But are you still making money after T-costs? Often times, you aren't.
Seems as if earnings potential from simply getting some money under management and using it yourselves would be far higher than the couple tens of millions a hedge fund might pay you for it...also...I highly doubt they'll let you keep it for yourselves as well as selling it to them...not unless it's either really not that great or they pay you almost nothing for it.
Seems unlikely. If you can prove it works you can probably convince a hedge fund platform to give you some capital and let you run it while keeping a cut of the profits. If you prove it really works (e.g. make money from it, not just backtests) maybe then you can sell it, but you'd probably be better off just going to a platform and getting the capital to trade either way. Part of the risk here is that the market is ever changing, and no one is going ot want a static algorithm whose creators wont be there to modify as needed.
Selling market making algo (Originally Posted: 04/11/2016)
Hi
I have been working as a trader/programmer for 15 years in the fintech industry. The past 3 years has been great fun as I developed my own tool for market making.
It has been greatly successful, and I have med 34 mio SEK in 3 years (out of a starting capital of 250k).
Last week I got a heart attack and I need to stop working 10-12 hours a day. Trading is stressing me out and my wife and kids has suffered as much as my health. I have to stop this now and focus on what is important in life.
I'm willing to sell the algo, I would suggest this not go to a single individual but rather 2-3 people taking it over. it requires some handling and development to adapt to market conditions.
Track-records etc can of course be provided and verified with broker.
serious inquiries/tips only please.
How much, and for what products?
From what I've seen, Hedge Funds/Asset managers generally hire teams that handle investments rather than purchasing algorithms directly. If the team running the algorithm has a good evidence that that the algorithm produces returns (track record), then the fund may be interested in bringing that team aboard.
Yes, you can "sell it" for 15% of your P&L....if the following conditions are met
1) max intra-period drawdown in backtest of 5% (including thru 2007/2008-->2020) 2) you trade the strategy in your own account with that 5m of real money at a broker like InteractiveBrokers, for 1 year and achieve the stated returns and risk parameters (you will have to show the IB daily returns to the fund as proof of forward testing)
After doing this, then you will be able to "sell" your strategy/algorithm for 15% of its P&L going forward (you'll also have to work at the fund and implement the algo yourself).
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