Distribution of profits or incentives by a firm using your system in their portfolio

Discussion in 'Professional Trading' started by Ialwayslearn, Jul 15, 2008.

  1. What are some of your ideas concerning the addition of some of your trading systems to an existing portfolio?

    Example...A firm currently has 9 systems they trade and want to add 1 of yours for a total of 10. There will be an equal allocation to each system thus giving your system 10% of the AUM.

    Assuming a standard 2 and 20% fee structure, they agree to give you half, so 1 and 10% on the 10% of the total AUM they agree to allocate to your system.

    Here is the challenge.....Incentives are not collected unless the enitre portfolio makes new equity highs.(The entire current AUM is from a third party who looks at the allocation as a whole, not system by system.)

    You will have months where your system is up, but the total portfolio is down and no incentive will be paid by the 3rd party to the firm. And vice versa.

    How would you suggest structuring the arrangement with the firm who wants to add your system (You personally don't have a direct relationship with the 3rd party who provided the money which makes up the portfolio) to make it fair for both parties?

    Thank you for your help.
  2. I think the firm should pay you 1% and 10% regardless of the performance of the other systems. They are taking a hefty fee for being middlemen. Is this a kind of incubation period or are you obligated to take 1 and 10 for a long time?

    One big risk is if 2 of the other systems blow up, and you do well, the investor might move their money elsewhere. I guess the firm will be keeping an eye on each system and will pull the plug if things get too bad?

    How about if losing systems gradually lose their slice of the AUM at a greater rate depending on their losses? i.e. if they lose 5% in a month they lose another 5% of AUM to the other systems?
  3. Thanks for the suggestion.

    Yes it is a "trial" period of sorts.

    The group that will be using my system has a unique arrangement with the "money guys".
    They bill them monthly based upon overall allocation performance.
    This allows them to get paid without expensing the AUM.

    I need to figure a way to be paid only on the merits of my system, as part of the whole portfolio, and not be unjustly enriched nor penalized by the rest of the portfolio's performance.

    I have to think someone has run into this before???