Selling an algorithm to hedge funds?

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?

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.

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.

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).