Need advice on how to proceed

[du$t]

I am a Physics PhD graduate (United States based) currently employed as a data scientist. During my time in graduate school, I published more than 90-95% of other graduates. My thesis focused on theoretical modeling and computational simulation, so the development and simulation/backtesting of electronic trading strategies came naturally to me. Based on my backtested strategies (using in-sample/out-of-sample methodology), I then went ahead and built a fully automated trading system- the opening/closing of positions is based on quantitative signals related to the behavior of equities/ETFs (NASDAQ, NYSE, AMEX) and other quantitative conditions. The live trading software (which uses a retail broker’s API) has been tested rigorously using real cash and is ‘ready to go’. I have been doing this work for the past 1.5 years (more than 2500 hours of work total), and amongst many other considerations, have conducted extensive research on the types of drags that need to be accounted for (and are) in my backtesting work (e.g. brokerage costs, dividend fees on short positions, drag from opening larger positions that also includes bid/ask spread (which scales as ~bid-ask spread + .5 * (daily vol %) * sqrt(position size / daily total traded)). Also, I have layers of redundancy to deal with the risks associated with placing trades electronically (basically, I assume there are very bad people on the other side who might try any trick possible to take my money, and I have the necessary countermeasures in place to prevent them from doing this using stoppers and the randomization of order placement).
I could go into more details, but in short, I know that I am sitting on a gold mine, and I want to trade my strategies using any manner of funding available without getting screwed over or getting my hard work stolen/taken from me in the process (though I am open to the possibility of someone taking ownership of my work if the compensation is sufficient). Trading my own money is out of the question because I don’t have enough, though I could demonstrate returns with >150K USD at a depth of 20 positions and 5$ per trade brokerage costs. I am aware of the various types of financial firms (prop shops, hedge funds, …..), and the possibility of raising money myself, but I am not sure what the best path is. I have heard of funds/banks ripping off the hard work of people and then kicking them to the curb, and I want to try my best to avoid this. Also, the answer to https://www.quora.com/What-is-the-best-way-to-raise-money-for-a-new-hedge-fund-with-no-track-record makes the challenge of raising capital on my own sound quite daunting. My suspicion is that a prop shop is the way to go, but I am not sure how this would go considering I have my own software written, though I should say that I could place the trades myself based on open/close signals generated from the software.
I do not want to be another story of ‘brilliant mind, but didn’t have the right connections to get things going for him’. With a system that is ready to go, what path do you recommend? Please feel free to message me to discuss in more detail.

Thanks in advance.

 

[tomorton]

Why haven't you been able to adapt your system to be be effective with just a modest account size?

 

[Solas0077]

Call Citadel or Steve Cohen or Simons at Renaissance.

 

[DionysusToast]

There are boutique funds that will effectively "loan" traders money to trade.

That would be your best bet.

Any other way would see you signing over your intellectual property. If what you have done actually works, they will be interested in that, not you.

Your problem is that you need to show them some sort of track record. For that, it would make sense for you to prove your system over a period of time on a small account.

 

[WklyOptions]

MyFXBook

Du$t,

At the very least - you'll need to have the following preparations in place before you'll get any sort of serious consideration (and potential funding):

1. Fully written trading plan (include scenarios for betting, contingencies, etc).
2. Your 1.5 yrs of trading results - include all forms of reporting metrics like Max Drawdown, Time to Recover to new Equity High, Sharpe Ratio, Volatility, etc.

While looking for potential favorable arrangements - see if you can get hooked up with MyFxBook - and begin real time trading (or even Demo trading). MyFxBook (if linked real-time) will track and prepare all forms of trade analytics that will be very helpful for allocators and risk mgrs.

3. I would suggest also looking at trade windows - usually between groups of 30 to 100 closed trades. Then determine the metrics again, including EDGE, P/L, etc.

It is preferable if have at least 3 sets of "windows" with metrics of the results.

Even a short time on MyFxBook tracking (3-6 mos) - if you have the positive results and strong metrics - you will begin to receive inquiries, etc.

Good luck - running a book is not an easy business b/c you will have to be proactive about managing expectations, results, etc.

But it sounds like you are off to a strong start at least with already having an automated system - now need to measure the past results/metrics, and test forward next 3-6 mos on MyFxBook.

Regards,

WklyOptions

 

[tomorton]

Its not obvious how you can have developed a red hot system that a) only works with big money, while b) you don't have a smaller scale version (say, one that you developed your main system from) but c) you're not a trader with a simpler maybe radically different system that could gather the investment capital you need through profitable trading.

People will start to wonder if maybe you have designed a trading system while being unable to trade and how is that possible.

 

[IFeelFree]

Its not obvious how you can have developed a red hot system that a) only works with big money, while b) you don't have a smaller scale version (say, one that you developed your main system from) but c) you're not a trader with a simpler maybe radically different system that could gather the investment capital you need through profitable trading.

People will start to wonder if maybe you have designed a trading system while being unable to trade and how is that possible.

I traded a couple of private messages with him. He seems like he knows what he's doing but he's very secretive about his algorithm(s). I revealed details about my algorithmic trading strategy, but the most he would say is that he uses mean-reversion. I also questioned why he doesn't just trade whatever funds he has. (Even $5,000 ought to be enough to start. He's employed as a data analyst so I'd be surprised if he couldn't come up with a few thousand dollars.) I say, test it out in live trading for a while before you seek investment or borrow money.

 

[du$t]

Thanks guys

Thanks for the advice guys, I really appreciate it and this knowledge will be a big help moving forward.

 

[tomorton]

By all means come back with a bit more if it helps makes sense of the picture.

 

[du$t]

@tomorton: it is relatively simple to simulate the effect of drag from transaction costs and things like slippage from trading larger amounts (I touched upon this in my original post).

I have tested the opening and closing codes in depth using actual cash. The main reason I do not want to trade with a smaller amount- say 5k USD- is that the account's value will erode quickly due to transaction costs eating profits. The caveat is that I could still make arguments about alpha that would have been generated had a larger amount been traded, but I think for demonstrative purposes, it is much better to be able to make a statement like (I generated 20% on 100K after 6 months, for example). I have managed to scrap together 75k USD, which will be enough to smother out the effect of trading drag and demonstrate returns. Thanks again for all of your help.

 

[tomorton]

Understood. Cheers.