Found trading anomaly . Want to raise capital now.

Hi All,

I'm an individual investor/trader with no formal financial background. I come from the software engineering world, but I do have a passion for capital markets and have been exploring trading ideas since late 2007. I was fortunate enough to discover an arbitrage trading anomaly that doesn't require HFT front of book management, and works "OK" with a typical discount brokers commissions. However, I am not completely satisfied (not making $$$ hand over fist). The anomaly has much more potential, and I not enough working capital. I can see other larger participants extracting from the anomaly, so I am also concerned that overtime the anomaly pool will begin to dry up as more participants discover similar strategies.

My question then is, what is the recommended path someone in my situation should take? Form an LLC to accept investor funds? Start a hedge fund (not sure what that means exactly)? Does one need to have a series XX? Find a salesperson with capital market connections? Find a partner?

I'm based in the San Francisco Bay Area.

Thanks.

Comments (21)

 
Oct 31, 2011 - 8:33pm

Thanks Macro Arb. I didn't think of going through a prop firm. My concern with going that route is that they would gain insight into how the strategy works and naturally I would like to keep that private.

 
Oct 31, 2011 - 9:21pm

How do you think you are in the league to start a fund if you're newfound strategy is all you have and the alpha decay is so fast you literally see it happening?

A lot of people, even smart people, recognize what they think is arbitrage and soon find out just how much risk was really there. Keep making money for yourself if you can, the minute you get prideful or greedy you'll be finished.

 
Oct 31, 2011 - 9:59pm

jktecon:
How do you think you are in the league to start a fund if you're newfound strategy is all you have and the alpha decay is so fast you literally see it happening?

A lot of people, even smart people, recognize what they think is arbitrage and soon find out just how much risk was really there. Keep making money for yourself if you can, the minute you get prideful or greedy you'll be finished.

completely agree, i know a very smart guy in software engineering who found what he believed to be the golden ticket to greatness, dumped his 401k in (albeit he's pretty young) and lost like 50% of it before he quit

My drinkin' problem left today, she packed up all her bags and walked away.
 
Oct 31, 2011 - 9:57pm

Generally you can go to an arcade that has the potential for algos. There you put up your own capital, the fund can either add more and take a split or you just trade your own. If you need more capital, there really isn't any other way than either setting up your own fund and accepting money or working as a programmer for a larger fund- and demanding that you have IP rights over your work. Problem with #1 is that you exploit the opportunity and you have no other trading strategies, #2's problem is that I have no idea what programmers IP rights are, but I assume taht the idea I posted is laughable.

Reality hits you hard, bro...
 
Nov 1, 2011 - 1:29am

Thanks MMBinNC

MMBinNC:
Generally you can go to an arcade that has the potential for algos. There you put up your own capital, the fund can either add more and take a split or you just trade your own. If you need more capital, there really isn't any other way than either setting up your own fund and accepting money or working as a programmer for a larger fund- and demanding that you have IP rights over your work. Problem with #1 is that you exploit the opportunity and you have no other trading strategies, #2's problem is that I have no idea what programmers IP rights are, but I assume taht the idea I posted is laughable.
 
Oct 31, 2011 - 11:09pm

I recently discussed this topic with one of the founders of LTCM. His view was that without disclosing your idea, in the current environment it is next to impossible to get funded, even if the idea is a good one. He suggested finding a reputable investor who you can trust, get him to put in some money (after disclosing idea to him) and then use that "sponsorship" to raise funds. That, or build up a track record using friends and family funding, but even then getting funded with a black box is no walk in the park, no matter who you are or what sort of record you have.

 
Nov 1, 2011 - 1:33am

Dr Joe, good info also.

Dr Joe:
I recently discussed this topic with one of the founders of LTCM. His view was that without disclosing your idea, in the current environment it is next to impossible to get funded, even if the idea is a good one. He suggested finding a reputable investor who you can trust, get him to put in some money (after disclosing idea to him) and then use that "sponsorship" to raise funds. That, or build up a track record using friends and family funding, but even then getting funded with a black box is no walk in the park, no matter who you are or what sort of record you have.
 
Oct 31, 2011 - 11:12pm

Also, regarding prop shops that allow you to use your own capital - watch out for the fine print. They almost certainly will have authority to monitor trades, and if you start making lots of money, they will figure out what you are doing via trade history. Actually this probably applies for all prop shops.

 
Nov 1, 2011 - 3:47am

baywolf:
Hi All,

I'm an individual investor/trader with no formal financial background. I come from the software engineering world, but I do have a passion for capital markets and have been exploring trading ideas since late 2007. I was fortunate enough to discover an arbitrage trading anomaly that doesn't require HFT front of book management, and works "OK" with a typical discount brokers commissions. However, I am not completely satisfied (not making $$$ hand over fist). The anomaly has much more potential, and I not enough working capital. I can see other larger participants extracting from the anomaly, so I am also concerned that overtime the anomaly pool will begin to dry up as more participants discover similar strategies.

My question then is, what is the recommended path someone in my situation should take? Form an LLC to accept investor funds? Start a hedge fund (not sure what that means exactly)? Does one need to have a series XX? Find a salesperson with capital market connections? Find a partner?

I'm based in the San Francisco Bay Area.

Thanks.

Screw it, I wonder if it's more evil to deceive people out of their money or to show them how to lose it themselves?

In any case you can start an investment club, where you have meetings and everyone discusses strategies to allocate the money. Regardless you aren't going to get someone's money without letting them know something about what you're doing with it. After you start this investment club you should be able to convince people to join based on your self proclaimed brilliance and sure fire strategy.

Make everyone millions and people will take note/ encourage you to get more secretive and more profitable. Start the hedge fund now that you can afford lawyers and an employee. Make billions.....winner

 
Nov 1, 2011 - 1:32pm

I think its best if we keep this thread focused on the original topic of programmers seeking capital.

Eventually I'll have to share some details with investors/lenders, and I am aware of the value of sharing information publicly, so maybe in the future I'll start a thread focused on stats.

byronbluth:
How long have you been trading on the idea? Care to share return stats with the internet population?
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