how to take liquid medium/high frequency trading strategy with good returns to hedge fund

So, after many years i've developed a trading strategy with pretty good returns...profitable over the last several years (back test) and hitting comparable returns over the last 3 months live.  Very short position holding times...almost never holds positions overnight (90% of trades  are in liquid futures like treasury bonds from 1am in NY --> 3pm in NY).  Previously worked at a bank on a trading desk where i learned some of the inputs....but has taken some time to tweak the model and then with some creative rules created a very profitable system (avg 50-70% annual return per year in the backtest, max 8% total drawdown at trough...could probably manage max 500mm - 1bln at scale before serious reduction in % returns from execution slippage).  In backtest the rule is must always aggress, hit the bid / lift the offer, and still seeing these returns.

Unfortunately, i'm no longer at an institution (been semi-retired for a few years) and so now just trading this strategy with small amount of personal money in my pa.  How do i get back into an institutional risk taking seat where i can trade this strategy (all my former coworkers have retired)?  Something like Millenium or Citadel would work but how do i get a risk taking seat at one of these firms.  i don't know anybody there.  To stay within their risk params i would initially cut the risk size in half, so if history rhymes, i would be looking at 25-35% annual returns just to be safe, and then would scale up risk linearly as P&L cushion grows.  This is a high frequency strategy (not "ultra" high frequency...don't need laser connections to the various exchanges...but high frequency intraday)

has anybody done this?  what's the magic path for an outsider to get an interview? (as a new PM at a fund like millenium).

I realize this is more in the world of prop trading than a hedge fund (there is nothing "hedged" about a short term trading strategy.....but i know they do this...possibly 2sigma, rentec, something like that, but i'm not a rocket scientist and so i doubt they would hire me).

Comments (13)

Most Helpful
Oct 26, 2021 - 5:58pm

This question has been answered many many times here before. Search for "sell my strategy". The short answer is build up a track record of trading your strategy with real money for a year or two first and then *MAYBE* some hedge fund might talk to you; but if you haven't done that, then it's a non-starter. 

But honestly, if you're claiming 50-70% backtest returns (or 25-35% if you "cut the risk size in half"), then no offense, but I frankly don't believe you. That's RenTech level of returns, Greatest Of All Time returns, and those guys have dozens of PhD quants and spend tens of millions of dollars a year on data and computing resources you can't even imagine. Ask yourself honestly -- do you really think you're such a genius that your part time hobby project developed on a shoestring budget is out-performing nearly every other hedge fund in the world?

I might believe that if you were only trading a few thousand dollars, but you say your strategy could handle "500mm - 1bln at scale"?!? Do you really believe you are such a  genius that you single-handedly figured out something that everyone else on Wall Street missed? 

  • VP in PropTrad
Oct 26, 2021 - 7:19pm

i used to be a dealer in the product where i have developed my strategy...all the dealers provide the necessary liquidity to trade this strategy with up to 500mm of capital at very tight bid/ask spread.  However, above 500mm, the spread starts to widen, executin slippage starts to kick in....12 tick trades become 8-10 tick trades etc...

could very easily call dealer 1 and ask for 300mm of liquidity, then call dealer 2 and ask for 300mm of liquidity, etc....and they will fall over themselves to provide tight bid/ask spread, because they all want tt see the flow.  Thats how i would scale this up to 1bln...at which point, when i'm right, the price would have moved away from my entry and...slippage.

Anyway, back to the original question....which hedge funds / prop trading firms would be interested?  and how to go about contacting them?

  • VP in PropTrad
Oct 26, 2021 - 7:21pm

also, just to be clear, i'm not looking to sell ny strategy....i'm looking for a job as a prop trader.  Not a market maker, but an actual prop trader.  These must still exist somewhere.  I'd expect to start out with a small amount of capital and then scale up as mgmt becomes more confident in the strategy.

Oct 26, 2021 - 8:21pm

Lots of companies hire prop traders. If you used to work at a dealer in this space then you ought to already know the names of a dozen companies (or at least know what to google for). If you've already worked in this space, then any good recruiter should be able to get you some phone screen interviews, and if you interview well, it's quite possible one of them might hire you. Happens all the time. 

In the interview, mention your strategy as a fun side project you did cause you're passionate about the area, and that might convince someone to take a chance on hiring you. But my advice -- don't mention "50-75% returns...with max 8% drawdown...with 500m-1billion at scale" cause those numbers are just so wildly ridiculously too-good-to-be-true.  I mean those really are Greatest-Of-All-Time numbers. No offense, but I would instantly reject any candidate who claimed to be that good as either lying or clueless. If you've worked in this space before, you should be aware of how incredible your claim is. If you really are that good, then wow, but honestly, the odds are massively against it. 

Oct 28, 2021 - 4:23am

3 months is not enough of a track record (though it is good that you have started trading and are not one of the "only has a backtest" people, you will learn a lot more this way) you probably need 1-2 years before Millenium or Citadel will take you seriously, unless you have a good background outside of the strategy.

I have traded strategies in exactly this domain before and (a) you are way overestimating capacity, there is no way you will generate $250M/year (50% on $500M) in P&L at those turnovers without a large dedicated team running many different kinds of strategies together, the top platform teams with dozens of people generate that kind of P&L. You can probably generate $5-10M/year on your strategy at that turnover before costs start killing your returns, don't make claims like you did above otherwise the multimanagers will think you're very inexperienced at running risk and won't bother talking further (b) based on your backtest description you are probably shorting some tail risk you either genuinely don't know about or are hiding, be warned that the platforms are great at catching this, analyze the value at risk of your positions closely (not the max drawdown of your strategy in the backtest, but the max drawdown the positions you are currently holding have had on various multiples of your holding period - if you are holding for a half day on average, my best guess on your real strategy drawdown risk is probably your current holdings top decile drawdown, without any stop losses, times 2-3). (c) there is probably a person at Citadel / Millenium already doing what you are, and you are going to have to make the case you are better than or at least diversifying to them, or have to wait even longer to have a track record that they can successfully correlate.

Both millenium & citadel are responsive to emails from people with sufficient track records, but based on the way you described your strategy it sounds like you would benefit from a year or two of trading it and learning instead of risking leaving a bad impression. 

  • VP in PropTrad
Oct 28, 2021 - 10:07am

Without leverage, sure, divide those numbers by 5...so ~15% annual return with no leverage, for a successful active trading strategy.

For simplicity sake (i'm abstracting a bit here, but just follow along)

imagine you are trading 500mm 10yr notes in the US Treasury market...that is $156k / tick

imagine you buy your 500mm, and they go up 10 ticks, and then you sell to get flat...thats $1.5mm

Trading 500mm 10yr notes you will get screws liquidity from the dealers (thats about the max you can get on the screws with consistency).  if the screen is 23+ / 24 that's what most dealers will quote for up to 500mm

50 trading weeks in a year, imagine on net/net after lots of scratch wins and losses that cancel each other out, you do this once per week  = $75mm on trading clips of 500mm 10yr notes, 1 net winning trade per week.

However, in the US treasury market, most participants are leveraged...lets say you use 5x leverage (so, your clip size would now be 2.5bln 10yr notes if you have 500mm of capital and are 5x levered)  Will probably have to pay at least 1 tick on avg to get that trade done...so now your 10 tick trade is 8 ticks...the 23+/24 market is now 22+ / 25

2.5bln = 780k/tick * 8 ticks = 6.25mm per winning trade (on avg) * 50 weeks = ~ $300mm on 500mm of capital = 60% return after slippage at that level.  As size increase, so does slippage.  at 5bln 10yr notes will probably cost 2 ticks to enter/exit  23+/24 becomes 21+ / 26, and so now a 10 tick trade is only making 6 ticks...but still profitable.  You will probably have to split up this trade among 2-3 dealers, where each sees only 1-2bln but there are over 20 dealers, so you make the rounds to get slightly better liquidity, and you'll use a couple junior execution traders so you can hit 3-4 dealers at the same time while you try to disguise your activity.

however, scale that down to an avg new PM at these funds with $100mm of actual capital pre leverage...so trading clips of 250mm-500mm 10yr notes (here you get very liquid bid/ask spread from the dealers).  Here you make $75mm on a capital base of 100mm, levered up to 500mm for trading. 

Without leverage, sure, reduce and divide those numbers by 5...so ~15% annual return with no leverage....still pretty good.  make $15mm on 100mm of capital...get paid ~15% of 15mm = 2.25mm  not bad for a 1st time pm at a platform...and then you start adding leverage....2x, maybe 3x.  i know most non-traders don't understand this....but...its possible.  Of course, at scale, when actual capital pre-leverage gets above 500mm this strategy breaks....no dealer will give screws liquidity for 2bln 10yr notes, and the scratches will cost more to get out, so the returns above 500mm-1bln of capital quickly go to zero if using 5x leverage...so returns are maxed at some $ amount of around $200-300mm   +/-

still not a bad problem to have.

Oct 28, 2021 - 12:24pm

Even if we ignore market impact and transaction cost and all that stuff, you're still claiming you can consistently predict 10 tick movements in treasuries, which are one of the most efficient asset classes in the world. That alone is an incredible claim for one guy working alone -- remember the market makers have way way way way more information than you do, and if it was easy to predict the direction of treasuries, they would have already be pricing that in to the quotes they give you. 

If you really are that good, then wow. But it's good to remind yourself that wall street has ~300,000 people who are all just as smart as you and they have more information and resources than you. Do you really think you figured out something that all of them missed? 

Oct 28, 2021 - 1:56pm

I am confused. Unless you don't have a sufficient base of capital, why would you want to work for someone else executing this strategy when, as you claim, you have a system that generates sustainable massive alpha? Just clip your 50-75% per annum and compound those gains and you will literally be a billionaire in 10-20 years? What am I missing.

  • VP in PropTrad
Oct 28, 2021 - 3:35pm

yes, i need access to capital to trade

i'm not asking for anything more than what a junior trader at any of the major prop trading firms has access to.  i'm confident i can prove my worth from that point and scale up as i grow my P&L

the avg PM at millenium gets fired within 18 months...many much shorter than that.   i'm highly confident that i would do very well there (or any of the other platform funds), if given the chance.

if i could just get my hands on 200k of stop out capital (able to go down 200k before getting stopped out), then i would be able to scale that up pretty quickly.  if i could go back in time with what i know now, then i would have slayed when i was on a trading desk, but back then i didn't know anything.

  • Intern in HF - EquityHedge
Dec 11, 2021 - 1:07pm

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