Hypothetical Question

Discussion in 'Professional Trading' started by Corso482, Oct 19, 2003.

  1. You have a system that is awesome, great stats, performs well in all kinds of markets and by the looks of it, will continue to do well. However, you have absolutely no economics/finance education and almost no means by which to raise money. You look shitty on paper and probably will have a difficult if not impossible time raising money.

    Your friend has all the econ/finance education in the world, lots of money, and lots of connections with rich people who're eager to invest. However, despite all of his credentials and connections, he has no friggin clue how to actually make money trading.

    Do you partner up with him to start a hedge fund, knowing that he'll easily be able to raise millions? Or do you stick it out on your own, hoping that eventually your peformance will attract investors?

    Remember, once your rich friend has your system, you are completely expendable.
  2. the hypothetical system writer should keep it under wraps! (and trade himself for a while, even if just with 5k and a one lot).
  3. omcate


    This pair of hypothetical friends have different background, and have chosen different paths. Chances are they act and think VERY differently. There will be big communication problems for people from two different worlds. Try not to mix friendship with business. When there is conflict of interest, things can turn ugly. The dramatic Citigroup boardroom showdown between John Reed and Sandy Weill for control of the financial powerhouse is a good example.

    Just my two cents.

    :p :p :p
    :D :D :D
  4. Same problem here.

    I have a system that is 100% correct for 30% of the NASDAQ listed stocks under $5 with beta volitility over 3 for the past 5 years.

    Also, the other 70% that aren't 100% correct are at minimum 80% correct, which is still very viable.

    All stocks under this catagory had positive returns over the past 4 years.

    I have next to nothing in capital right now (<$4000) currently in swing trades, and my strategy requires atleast $25000 due to the Pattern Day Trading Rules, preferablly $40000 in case of short term drawdowns.

    I programed my strategy in Wealth Labs Developer, using the demo version which expires in about a week. I do not have appropriate capital to pay the $600 licence fee for the software.

    I have two friends with ample amounts of capital and are open minded to new investment opportunities. I've sat down with both of them and went through the backtested results. They both are very impressed.

    Now, my situation is here: They are both willing to invest $40000 each. Also, i would have to give up Proprietorship over my stratagy as they would requrie to know the full inner details of my system.

    As a business person, the answer would be to go for it in a joint venture, as time is money, and if i were to do it myself, it would eat up atleast 2 years while working.

    But, i can't help thinking whether i would be left in the dust once my system is in the open. What's to stop them from setting up their own account and trading the system without joint sharing of the profits?

    Contracts could get ugly.
  5. On the surface, the answer would appear to be nothing. However, I wonder if there are legal agreements which can be structured to prevent this.:confused:

    Anyway, I suppose the answer would depend on what your ultimate goal is: Do you want to trade the system yourself for some extra income and milk it for however long it works? Or do you want to make a career of it? I'm guessing that if you want to make a career of it, then raising money is essential, and the abilitiy to raise money is just as important as the ability to trade.

    On the other hand, even if you just want some extra income for yourself, you'd have to realisitially assess how long, if ever, it would take you to raise the money yourself. If it turns out you'd take forever to raise the money, it might make sense to give up some ownership of the system to make some money off it because in reality, you'd make nothing by just sitting on the system with no funding.

    Then again, I don't know what the hell I'm talking about because I asked the question in the first place.
  6. I plan on having the Auto Trade feature for Wealth Lab Developer to trade for me automatically.

    The system I wrote was backtested for all available data, sometimes dating back 15 years, and still shows 100% accuracy in trades.

    I plan on using this system as my primary source of income, with or without outside funding.

    Realistically, if I were to fund the account myself with $40000, it would take me approximately 2 years, when you minus all of my expenses from my net income.

    But with the miricals of compound interest, being 2 years ahead of the game means big bucks in the end.
  7. You need them - they need you. What's the win win ?

    Don't wait the two years - take their investment. If you have a system that is that good make some money now while you can - but be clear with them that you are not willing to give 100% disclosure of the system. Give them enough to understand and trust it but not enough to steal it. Agree that if at some point in the future you all want to part ways, they have to pay you an agreed (now) fee for the full system.

    Just my 2 cents

    Good luck.

  8. first of all you do not have a good system if it hasn't been traded profitably with real money. backtesting is not trading.
    secondly if you by chance did have a good system it is no different than a person who has a great idea for an internet business. if you had a great business idea you would have to go out and raise money to fund the idea. put yourself in the other persons shoes. you are asking them to give you money for an unproven idea. you have two choices. one is to convince somebody to loan you the money but this would require some proof that the person loaning you the money would get paid back. the second way is to raise venture capital. venture capital investors aren't stupid. they know the chances you succeed are not that good so they want a piece of the pie if you do make it. if you aren't willing to share with an investor you don't have much chance of getting any money.
  9. jessie


    First, the sort of partnering agreements that have been mentioned here are fairly common, and a reasonable way to raise the capital needed to start off, if you truly have a profitable system. Even if they should steal it, if the impact of a couple more people trading your system is so devastating that it would screw things up, however, it certainly isn't robust enough to use in the real world. The previous poster is right, though. A system developed and backtested is still a "hypothetically" profitable system, and the fact that it is 100% profitable simply means that it has been over curve fitted. It is actually much easier to develop a system that is 100% right in backtesting than one that is "less" accurate but more robust. I (or any fairly experienced programmer with a cheap backtesting program) can develop a 100% accurate system in a few minutes by simply adding indicators and filters to "correct" for losses until it "works" in all conditions, but that will fall apart in real time use. Not to discourage you, but it's just not that easy to transition a system from backtesting to real time.
    Good Trading,
  10. Jessie,

    I rarely see anything so valuable as this on ET.

    Be good,

    #10     Oct 19, 2003