Career Advice-- dilemma.

[indexbandit]

So I run mechanical trading systems currently for a fund of funds and have had some success. I started the year modeling trades for them real-time and have just gone live trading their account. The intention was that we were to start out with a relatively small amount of money, with new funds added as performance improved. The current deal I have pays me a on a 50/50 split of profits. Once the account hit a certain benchmark, it would be closed and a new account was to be established as a managed futures fund. All sounds pretty good, right?

Well, here is the problem. The FoF manager is now trying to change the terms of the agreement. He is a friend of a "friend" of mine, and the intention was that I would hire the introducing "friend" once the new account was properly funded and up and running. Well, it turns out that the two of them were schemeing behind my back and I've just been informed that if I don't agree to split my profits 50/50 with the introducing "friend", the deal is off. The problem is that I have no idea how much funding they are talking about and what the new profit split would be under the new managed futures fund agreement. Basically I've been told to agree to give up half of what I would potentially make (whatever that may be) as the FoF manager says that he would not have even considered me if not for his friendship with the introducing "friend".

Here's where it gets tricky. I have been teaching the introducing "friend" parts of the system and even gave him a small piece of code so he could learn and be up to speed when he was needed. Obviously, like an idiot, I entered into the beginning of a business with friends WITHOUT signed agreements (non-competes, disclosures, etc.) and only have my original operating agreement for the account I'm currently trading.

Without making me feel worse than I do for being an idiot-- what would you do if you were in this situation?

The way I see it, I have 3 options.

1. Agree to new terms, but up the ante on the current account, trade it very aggressively and hope to make enough with my 50/50 split to be able to run my systems myself

2. Agree to terms LESS favorable than what is offered, basically making myself a passive investor (for the use of the partial system)-- and let them screw up while going out and looking for other funding on my own

3. Walk away with nothing.


What would you do? I have spent far too much time and effort on this project and don't really have any other options at this point. Thanks for reading. Good trading to all!

 

[indexbandit]

Thanks for the reply Jammer. Yes, I am pretty sure that the well has been poisoned and normally I wouldn't think twice about walking away, however, I have poured a ton of cash into getting this thing developed-- I am not a programmer- and quite frankly do not have enough capital to trade this system optimally. The wife is already on my ass about the money I've spent so far, and I fear that trading the system while under-capitalized is a death wish.

I have seen these job posts for systematic traders, but the problem is that the track record of the system is not with real money. Its not back-tested results, but basically paper traded. Also, everybody is looking for someone who can trade AND is a programmer-- or runs some sort of already established and known strategy such as stat arb, volitility, event-driven, etc. My system doesn't fall into any of those categories.

How can I make myself more attractive to those job posts? Most of these posts are from headhunters, who know very little about trading but yet are tasked with finding talent. Any advice on that front? Thanks.

 

[grantx]

Index,

I would also recommend walking away but it seems that isn't really an option. Go along with these two sh1ts until you have sufficient funds to set up yourself. I reckon they need you more than they - or you - realise. Once you've made a packet, tell them to either fck off or improve terms. Try and pick up some dirt along the way for future reference - if this how they conduct business, doubtless they'll pull fast ones with clients.

Grant.

 

[Hoggums]

I know that this has cost you a lot of money - but you've missed another option. Basically given that you have two unscrupulous colleagues who you could now never trust again I would play them at their own game and tell them no.

Make sure they do not have access to any of your intellectual property and start negotiating with them. Tell them 50/50 is unacceptable and you will only agree to 90/10. You need to decide where your bottom line is here, but start the ball rolling on some sort of negotiation and get yourself a bigger share of those profits. DO NOT give in to them too easily, this is business and your livelyhood.

Remind them that if there is no agreement then there will be no technical support for the system and if it goes wrong there will be no-one to sort it out. Remind them that automatic systems need constant tweaking to remain up to date with the current market situation.

 

[indexbandit]

Thanks guys.

Grant- just last week we were talking about how to hedge mechanical day trading systems, as this seemed to be the "problem" I was having with my backers. Turns out I had bigger problems. LOL I just spent the morning compiling all the lies and the timeline to how this thing pans out, but I dont think the FoF guy is going to care. He basically told me that he was looking to help the other guy out and were it not for that fact, we wouldn't be in business. If I do go along, I need to now have an iron-clad agreement in place (particularly about protection for me and my system, how to end the relationship if need be, and a schedule for distribution of funds) This is bound to tip my hand as to what I am looking to do-- namely make some quick cash and get out-- so I am doubtful that they will accept those terms. Also, he is a big player and represents wealthy families so I highly doubt anyone is going to care about his unscrupulous behavior.

Hog- the problem is that the FoF guy really doesn't need me. The "introducing friend" does, but maybe he thinks with the small bit of code he has, he can make a go of it. While I'm not really concerned about them taking the system as I think this guy is a loser and will ultimately fail, if they brought in someone more competant they could potentially make it work. i have already alluded to the possible legal ramifictions of them doing so.

The more I thought about it, I don't think the FoF guy was conspiring against me, but rather being manipulated by the lies of the other guy. I'm thinking that if I expose these lies, he might be willing to make terms more in my favor. Its really the intro friend who is the scumbag -- if i can mitigate his participation I would be OK moving forward.

At the end of the day, they have the money, and I don't. I am most probably going to call their bluff and am prepared to walk away, but now what? Any ideas on what to do next?

 

[grantx]

Index,

Whatever you do, or however you split this, do not allow them access to the full code. If they have this, then they certainly won't need you.

"he is a big player and represents wealthy families...looking to help the other guy out". Why? To keep him quiet about an evening's drunken (or sober)indiscretion, perhaps?

Regardless of the terms, what's the betting the slimey fck will find a reason not to honour the agreement? If someone can sh1t on you, they will do. It's called capitalism, the game we're all playing.

Ignore the first paragraph - leave well alone, keep refining your system and in the meantime start re-building your capital (and get the wife off your case) . There is always a lot of money looking for good systems but there are a shortgage of good systems. It's a question of patience - the money will seek you out.

Grant.

 

[indexbandit]

Please Grant, for the love of all that is holy (and unholy), please tell me how the money will seek me out? Ha, I hadn't thought about the hush money factor in their friendship, but it seems more likely that he would pay straight cash rather than make him split with me.

As i mentioned, the scumbag does have a piece of code. It is basically the first generation release and is as basic as basic can be. I realize that if they could develop it they would no longer need me but there is no doubt in my mind that they would not be able to trade successfully off of it. Quite frankly, I wish they would attempt to steal it so I could close the door in good conscience knowing that I did all in my power to make it work.

To keep you updated, I did call their bluff and told them I was not going to agree to the new stipulations and if they did not want to continue I was going to walk. I imagine right now they are plotting their next move, as I haven't heard back in the last hour. I'll keep you posted, dear reader.

 

[grantx]

Finding the money is a combination of luck and appliance. You talk to someone who knows someone, etc. Word gets around. Not a particualrly scientific approach, but there you are.

Why don't you run paper-trades on a real-time simulator? This will provide a log/audit of all trades to show potential backers. The difference between sim and hard cash is academic - a good system on a simulator will still be a good system with hard cash.

You say it's applicable to many instruments. Well trade one of the e-minis in small size - 1 or 2 contracts and see how it pans out.

Grant.

 

[indexbandit]

Finding the money is a combination of luck and appliance. You talk to someone who knows someone, etc. Word gets around. Not a particualrly scientific approach, but there you are.

Why don't you run paper-trades on a real-time simulator? This will provide a log/audit of all trades to show potential backers. The difference between sim and hard cash is academic - a good system on a simulator will still be a good system with hard cash.

You say it's applicable to many instruments. Well trade one of the e-minis in small size - 1 or 2 contracts and see how it pans out.

Grant.

Well, I have tried that approach Grant, and look where it has gotten me. Frankly, I would much rather go into business with people I don't know and insist upon very detailed agreements and cover my ass with the utmost legalese. People you don't have personal relationships with tend not to be upset by these types of arrangements, people you do know sometimes do.

As far as running my trades on a real-time simulator, I have been doing that daily for the last 6 months until I went live last month. The problem I have with that is that I modelled specifically for different size accounts. First they wanted to see what i would do with 100K account size, then 1 mil, then 10 mil, then back to 100K then to 50K. So I have all of those trade days trade sheets plus the daily performance, but it is very sporadic as it was modelled for these guys specifically and there is no uniformity. But the performance has been excellent, with very high win ratios and good reward/risk. As I mentioned elsewhere on this forum, the sharpe ratio is running around 8. But again, not with real money.

If it were as simple as trading 1 or 2 emini contracts I would do it in a heartbeat. I have enough cash to open up that type of account. The issue with the system is that a component of it trades in a counter-trend fashion and it is hard to be able to pick exact tops and bottoms. what the system does is identify areas of accumulation and distribution and it is important to be able to scale into and out of positions. So while I know it will work with 1 or 2 contracts, the reward/risk numbers become skewed and the system is no longer robust. This is not a question of using excessive leverage, but rather of having an account large enough to trade optimally.

Also, did I mention I'm in NY? Money is a little tight around here these days and I'm thinking about looking in London. thoughts?

 

[grantx]

"So while I know it will work with 1 or 2 contracts, the reward/risk numbers become skewed and the system is no longer robust".

What is the minimum amount required for it to work? What are the minimum number of seperate instruments?

OK, it works for large account sizes. I'm sure you could adapt your system to cater for small trade sizes.

How many contracts (round-trips) are traded on the 50k account over a six-month period?

As I said, money isn't the problem. But you have to provide water-tight figures (albeit from a simulator) to back your claims, whether it takes three months or one year. The more you have, the better and the easier it will be to find a backer.

Grant.

 

[MrGecko]

Index,

By all accounts, it sounds like you've been shafted.

a "shot gun" response:

* Can you get an intellectual copywright on these systems? If you can, do so, sharpish. Might not be worth much, but worth something surely.

* Speak to your Solicitor, fill him in, and find out what it would take for the arrangements you want to be agreed beyond dispute - i.e. if you are going to be dealing with them in the future, get a water tight deal.

* If you are of the opinion that it is the "friend of a friend" that has shafted you and the FoF guy, perhaps you can collude? If you think the FoF guy hasn't been mistreatiung you - infact it is the "Friend" who is the problem - surely you could explain this to the FoF guy over a boozy lunch?? I would think your pitch is pretty straightforward, make a new deal direct with the money man and cut out the "friend", who having tried to screw both you and the FoF guy, you refuse to work with. It is you that designed the system, after all (and you have the I.C.) What is he bringing to the party?

* More a generalised piece of advice, but NEVER, NEVER threaten to do something in business unless you have the will and the means to do it properly - don't threaten to take them to court unless you can and you think you will win (which, in civil disputes, usually means having the most money).

* If your system has not returned any real life profits, then there is a strong case that it is practically worthless. Perhaps the most it is worth - it could be argued - is simply the cost of putting it together. A 50 - 50 deal from an untested system sounds pretty fair to me, even generous.

* If you go ahead, be sure NOT to put any more money in the pot. You have designed the system, that is your "sweat capital". They put in the trading capital, not you.

* Carve yourself a niche role in the deal, make yourself irreplaceable.

* following on from the point above, if you haven't got any of your capital behind it, you can always tailor the system to engineer results. I.e. after a solid run of results, make it ineffcient and ask for more money to fix it ("market conditions have changed" and so on... "yes I can look at it if you want, but I have another project that is very attractive at the moment..."). This might also serve as an opportunity to highlight the incompetance of your "friend" and get him pushed out of the boat. Not a nice way to do business though. NB: If you have got capital behind it, dont try this, they'll take all of yours before making a dent in theirs.

* One step further, you could always make some quick cash, turn all "buys" into "sells" and run like hell. Don't recommend this though.

 

[indexbandit]

"So while I know it will work with 1 or 2 contracts, the reward/risk numbers become skewed and the system is no longer robust".

What is the minimum amount required for it to work? What are the minimum number of seperate instruments?

OK, it works for large account sizes. I'm sure you could adapt your system to cater for small trade sizes.

How many contracts (round-trips) are traded on the 50k account over a six-month period?

As I said, money isn't the problem. But you have to provide water-tight figures (albeit from a simulator) to back your claims, whether it takes three months or one year. The more you have, the better and the easier it will be to find a backer.

Grant.

I wish I could give you a complete answer to your questions Grant. The signals generated by the system are market dependant (mostly volitility) and the frequency can vary depending on what type of day it is. For example, last thursday (i think) each system gave off 1 signal-- all short and remained that way all day. Because the trend reversed so early in the AM and the move was pure (started in its direction and didn't retrace at all) that would be a day which has less contracts traded then a range bound day.

I have the ability to apply this system to 14 different instruments (markets) right now, and hope to be able to add more as time and money permit. Currently i am only trading US market eminis (ER2, ES, YM, NQ) I have determined that I need a minimum of 250K if I were to take all signals and all trades on each instrument at the same time, but that would totally max me out which I am not looking to do. I'm sure it could be traded using a lesser amount-- but it would be WAY overleveraged. As discussed in our previous thread I have discretion over which trades I can take and I ususally do not load the boat. So its hard to determine how many RTs I may do in a given time period. I use ninja trader for my SIM trading and they give u a time-stamped ticket of when each trade was "executed"-- so its pretty good in that regard. It can be "generous" at times and doesn't always take slippage into account, but overall I have found it to be pretty reliable.

 

[indexbandit]

Index,

By all accounts, it sounds like you've been shafted.

a "shot gun" response:

* Can you get an intellectual copywright on these systems? If you can, do so, sharpish. Might not be worth much, but worth something surely.

* Speak to your Solicitor, fill him in, and find out what it would take for the arrangements you want to be agreed beyond dispute - i.e. if you are going to be dealing with them in the future, get a water tight deal.

* If you are of the opinion that it is the "friend of a friend" that has shafted you and the FoF guy, perhaps you can collude? If you think the FoF guy hasn't been mistreatiung you - infact it is the "Friend" who is the problem - surely you could explain this to the FoF guy over a boozy lunch?? I would think your pitch is pretty straightforward, make a new deal direct with the money man and cut out the "friend", who having tried to screw both you and the FoF guy, you refuse to work with. It is you that designed the system, after all (and you have the I.C.) What is he bringing to the party?

* More a generalised piece of advice, but NEVER, NEVER threaten to do something in business unless you have the will and the means to do it properly - don't threaten to take them to court unless you can and you think you will win (which, in civil disputes, usually means having the most money).

* If your system has not returned any real life profits, then there is a strong case that it is practically worthless. Perhaps the most it is worth - it could be argued - is simply the cost of putting it together. A 50 - 50 deal from an untested system sounds pretty fair to me, even generous.

* If you go ahead, be sure NOT to put any more money in the pot. You have designed the system, that is your "sweat capital". They put in the trading capital, not you.

* Carve yourself a niche role in the deal, make yourself irreplaceable.

* following on from the point above, if you haven't got any of your capital behind it, you can always tailor the system to engineer results. I.e. after a solid run of results, make it ineffcient and ask for more money to fix it ("market conditions have changed" and so on... "yes I can look at it if you want, but I have another project that is very attractive at the moment..."). This might also serve as an opportunity to highlight the incompetance of your "friend" and get him pushed out of the boat. Not a nice way to do business though. NB: If you have got capital behind it, dont try this, they'll take all of yours before making a dent in theirs.

* One step further, you could always make some quick cash, turn all "buys" into "sells" and run like hell. Don't recommend this though.

Thanks for joining the conversation- Gecko. To answer your replies for the sake of brevity:

1. Copyright law. I actually looked into this. Believe it or not, you actually have to disclose what your system is, so that the govt. agency knows whats not to be copied! As a matter of public record. LOL. Not a viable protection and might in fact do more harm than good.

2. i did speak to my lawyer and he basically told me I'm screwed. His advice was take it or leave it. While I could bring suit if they stole my code, I would have to prove that they obtained thru fraudulent means. basically throwing good money after bad.

3. I actually did write up a synopsis of the intoducing friend-- we'll call him scumbag for brevities sake-- detailing all of his shady behavior, bad faith business dealings, and lies and deceits. At the end of the day, I don't think this matters to the FoF guy as this is more about helping this other guy get back on his feet than actually trying to start a viable trading business. And the Fof guy isn't being screwed-- although he will be if he lets scumbag have any say in how this arrangement works out.

4. Yeah i don't think the court deal is viable either-- although I could use it to rattle the cage if I wanted to behave like a scumbag as well. The 50/50 deal was great and I was very appreciative of it. Now that we are trying to move forward with more capital, that percentage will come down unless I can do something unbelievable in the next 2 months which may justify a higher percentage. as it currently stands-- that doesn't matter so much as I have to split my end 50/50 with scumbag if I want the capital. I did model the system for them in a myriad of ways realtime, so while it doesn't have a real money track record, they could see the trades happening live.

5. My capital contibution will be none to this venture-- as I have already invested alot, my new wife is already complaining, and I made that perfectly clear. IMO, I AM the system. Not scumbag, nor the FoF guy bring anything to the table as far as the day to day administration of the system.

The situation is analgous to this: you've worked at a company for a while, and one day your boss shows up with his retard son and tells you to show him the ropes. After realizing that the kid is completely hopeless and useless, you are told by the boss that your peformance bonus will be affected by how this kid does. What do you do? Do you A)Try to teach the kid, knowing its near impossible for him to succeed. Or B) do his share of the work to make sure that its done right to not affect your bonus. Or C) look for a new job. That is what I'm dealing with here. Thanks all for reading. Stay tuned!

 

[grantx]

Index,

Re your first paragraph, if a signal keeps you in a sustained move, it's got to be good.

You say you need 250k minimum to take all signals on all four instruments. On the assumption that all orders will be aggregated in the one account, it may be an idea to seperate and compare the constituents. This will enable identification of the best/worst performers and possibly allow for better focus. Of course, if they have to be traded as complimentary constituents then it may undermine the bases of the strategy.

Without giving anything away, why does it take 250k - are there correlations/ratios/hedges simultaneously?

Grant.

 

[indexbandit]

The way I came up with the 250K was that if I sustained the max loss possible (assuming I exit on my stop), and took the maximum amount of signals and trades in all instruments, that the total loss would be 2% per instrument. Were I to do that, that would be a total loss of 8% overall if every signal failed. As I mentioned, I rarely take all trades in all instruments. In that instance, the recovery time is something like 1.2 days.

So the amount needed as nothing to do with the strategy, but rather the risk management. As far as the correlations go, if you recall from our other thread on hedging, the system acts independently of them and is sometimes too positively correlated. However, the system can be both long and short on the same instrument at the same time, when trading in different timeframes.

The way I have the systems set up, I break it up by region and time frame and asset class. While true that some contracts give you more bang for your buck, I generally prefer to trade smaller quantities of each instrument. Some days one leads, the other lags and vice versa. By maintaining consitency in each instrument you are pretty much guaranteed to catch a move. I let the big boys worry about the stat arb and such... I'm just along for the ride.

 

[Victor90]

If you decide to work with them i would get a lawyer reading the contract, becuse these guys might try to screw you.

 

[indexbandit]

Then you probably are. You dangled the opportunity of some litigation work in front of your lawyer and he didn't bite. A U.S. Lawyer? You kidding me? That in itself speaks volumes to me (unless you have the only honest one on the planet)

Walk away mate. Learn your lesson the hard way (they're always the ones that stick anyway) and start again. You probably learned a sh*tload while doing the work, so it's not like you're going back to ground zero anyway. And from the little you've revealed about what your findings were, it doesn't sound like the worst starting point in the world trading wise. Demo it, document everything properly this time (like you said, that side of things was a tad ad-hoc last time). Then make your move in 6m - 1y time I reckon. If it's good and robust that will be time well spent.

GJ

I like your style GJ. Fortunately-- or unfortunately depending on ones own worldview-- my lawyer is a personal friend of mine as well. And he is very aware of my inability to pay his outrageous fees should we lose.

There are negotiations going on right now as we speak. I'll keep you all posted.

 

[indexbandit]

Ok boys and girls, looks like we may be coming to an agreement. Here's what I've got:

Rather than setting up the structure as a managed futures fund with co-mingled funds, we are going to operate as a CTA with separate accounts. I am the manager of my funds and receive 100% of my incentive fees, scumbag gets his own fund with the same deal. Fof manager decides how to allocate funds-- but I get a minimum balance which I am happy with. They are going to sign all of the necessary documents (Non disclosure, non compete, and confidentiality) to protect my intellectual property. Break up provisions are put in place if either side decides to end the relationship, based on different criteria. I agree to help scumbag "learn".

I'm doing cartwheels!

 

[indexbandit]

Well done - hope it works out for you.

GJ

Thanks GJ, and to all who contributed to this post. I think that my posting was actually cathartic, and it helped slow me down and think more clearly. When I first posted, I was stilled pissed and maybe not thinking as rationally as I should have been. I came up with 3 choices which seemed logical at the time, but then I didn't consider other options. Until I came up with this scenario. Frankly I wasn't sure they were going to go for it, but when they realized I was prepared to walk, they agreed. Also, i feel like I was able to use scumbag's ego to my advantage.

As I said this AM: "look I'm giving you the gun, FoF is giving you the bullets, but you have to pull the trigger. Around here we eat what we kill, so if you can't hunt maybe you should be back at the lodge."

Only a matter of time before he blows up and they damn my system, and hopefully by that time I'll be off to greener pastures with my reputation, system, and integrity in tact.

 

[Victor90]

Great to hear that it works out for you!