Advice Needed: Black Box Financing Arrangement

Discussion in 'Professional Trading' started by Mountbank, Aug 23, 2006.

  1. Mountbank


    Hi, I need some advice. I have a trading strategy based on a lot of excel models. A company has offered to code and automate the strategy and fund the program. The IP for the strategy would be put into a LLC with myself and the partner company as 50% owners, 50/50 split of profit.

    Has anyone had experience with such arrangements? If so, what are the potential pitfalls and benefits? Quite honestly it seems too easy a deal and it makes me skeptical.

    All comments appreciated
  2. WinDiff


    I guess you are not the one who they want to put in the black box. He he he

    Do only 80/20 and nothing more

    50/50 is for wimps

  3. nitro


    If they fund it and take all the losses, imo you are not entitled to more than 60% unless you are the best negotiator on the planet. 50% is generous as well imo.

  4. you should be happy to be on a 50-50 with a black box.. normally won't get anything above 20-80.. in any case, they may become aware of the arithmetic if they are going to code it naked.. u may aswell go get a programmer with no clue about markets to do it all for u and pay-him goodbye.. but if they're funding it for u too, than 50-50 is what jim simmons is only worth.. and for those who tell u to get 80-20, im not sure what they know about such business..
  5. WinDiff


    If the BOX makes good fruits even 80-20 is too much

    No trader sells anything what makes money, just what doesn't any more. Ask Curtis if you don't believe me... He he he

  6. As WinDiff said, if your "method" is good, you can expect your financial backers to piggy-back, front-run, coat-tail and pirate your system. If it's good, bankroll it yourself anyway you can.
  7. what should the profit split be for a black box that is already developed, but requires more capital than I have?

    which firms offer the best deals on equity trading black boxes?
  8. Call me paranoid, but I think you should protect your intellectual property more. Perhaps it is possible to find proper "market neutral" financing - basically some guys/gals who have no clue about what you are doing? The less they are able, willing, and allowed to dabble in the markets themselves, the longer they will need you. I witnessed this first hand while working at a hedge fund - I could easily code most of the strategies of the discretionary traders (and have done so after I left:). I understood there why such labor-intensive methods like chart reading and fundamental analysis are prevalent in the industry, despite their ancient origins (the 30's): the only way traders can stay employed is to remain discretionary. Evolution has weeded out the black box trader. Methods used to separate the costly human inventor from his algos have already been mentioned, but I may also add phishing, hacking, and physical control of hard drives by trojan nephews (I'm dead serious - have read some hair-raising "calling home" e-mails:). Since then I will never be so naive as to even hold anything of value unencrypted or uncompiled online and I strongly feel that handing over the source code to some knowledgeable party is in a naivety league of its own, surpassed only by a publication in a scientific journal with a wide practitioner following. Do not get tempted by the money, do not get tempted by the power - both are of no use if your edge is stolen. Once they separate you from your intellectual property, they will withdraw their capital, and you are back to square one. And the edge will be much smaller, once they strart squeezing it with big money. In the inventor;s business it is the control that matters, and the freedom it brings. I do agree protecting your edge and simultaneously exposing it to outside capital is difficult. You don't want to lose control, and you cannot do it on your own indefinitely since it gives so much less satisfaction. And identyfing who constitutes a marriage material and who a gold-digger is more difficult than you may think. Play a hard-to-get a while, do not hurry choosing your long-term relationships, because everyone has only one edge in themselves... and it is so easily lost. As a rule of thumb, turn down any partner who is too inquisitive about your systems' details - and anyone with the necessary knowledge aquisition skills, engineers for instance, especially software ones, should be ruled out immediately. Professional funds should be considered only if it is their business to seek out new talent and invest in it, as opposed to just employ it (this contract simply does not work for inventors, it just doesn't). But run for the hills if the FoHF manager instead of correlation asks you about the automation. I have no doubt that such for fora as this one are frequented by some trustworthy edge-seekers. Simply try posting your performance here and there. Say that your system earns four times the monthly market return with market volatility and has done so consistently for 12 years, including the last 6 months out of sample, in real time simulations, and after costs. Say it is uncorrelated, with beta below 0.2, and that it has never been optimized other than manually. Well then someone may just find you. They may even ignore the kurtosis. Or is it me who is naive here?

  9. Grant



    Why not suggest they provide trading capital with which you trade on a discretionaary basis utilising your system out of sight, ie do it from home?

    If it is that good and produces the returns you and they are confident of, they should be happy. If not, then they are just greedy.

    Aren't star traders recruited on results, not methods?

  10. Why are you getting LEGAL ADVICE at Elite Trader?
    That kinda tells me how seriously you are to be taken.

    If you cannot hire a good Law Firm ** experienced in Securities Law and IP Law **...
    To protect YOU while 2 parties draw up a contract...
    And do not have at least $50-$100K to litigate and win if necessary...
    Then your chances of hanging on to your IP is precisely ZERO.

    It's not "illegal" to lie to you and steal your software.
    It only becomes "illegal" if you enforce your contract through litigation...
    And win your case in court...
    And then have the verdict hold up on appeal... in a few years.
    #10     Sep 16, 2006