A friend/colleauge of mine is a succesful trader. He has built out a very unique algo that makes money in stocks most days and goes home flat. Not your typical TA or tape reading or rebate styles found in shops. He offered me the chance to trade his system with my capital and share in the PnL. 25k in the intial account("must have skin in the game"). Firm provides 10-1 intraday. 65/35% split. I pay .005 pershare...he pays .004 so he takes the .001 for data and technology fees, office..etc. He has the complete trading plan, software and risk management in place. All he needs to do is train me on his protocol. I already asked him "why share at all? Just run and gun it with your cap" his answer "I am in the process of automating and it will take awhile to get there 100% so if I can get more eyes on the screen, supply all the proper tools and take a fair split, why not do it. Nobody is taking my data or strat home so I feel safe in allowing a group to participate in my office". I would like to hear some questions that somebody who doesnt know him would ask if offered the same chance. Maybe i`m missing something here? Just want to be really safe. And I prefer being considered a cynic to a sucker. This is NOT a solicitation. No pm`s please.
Sounds interesting. SImilar to the LAST Atlantis program of mid 90's but they funded you 100% , the skin in the game is the problem--no need if the algo really works. ZMW
Ask him to put up at least half the capital. Skin in the game always shows who is real and who is not.
Why didn't he just hire someone to trade the system based on signals. He can actually get a low paid intern to do so. That is the standard way to go about in the industry, get an execution trader. Why get you involved, then charge you an override (.005 is not a good rate, btw), and take a profit split all while it's only your risk capital? Sounds like a no-lose situation for him. You need to ask yourself what YOU would do if the positions were switched. Does it at all make sense what he is offering you if the algo was really any good?
thanks for the responses everbody and they are all very good points I have seen the system run live and the signals are complex. He wants only experienced traders running it. It would take a year to train an unexperienced intern to execute based on it. Its not point and click at all. Thats why its also taking a long time to get automated. He said if someone is a serious trader that is really intent on trading an approach that works and getting in with a good group then 25k in the kitty shouldnt be an issue. He is running his system from a dma platform at a(huge) retail shop. They dont offer those low prop rates but they are backing his algo with 10-1 leverage for his proposed group AND they are paying him well for his signals on their inst side so he has no intention of leaving them. The cap up front initially put me off also. I would rather take 25% or less and trade his cap. Or a lesser split where a portion goes into the kitty until its reached the 25k then payout increases. There may be flexibility there. thanks folks
There are quite a few holes to pick there, and it seems shady. I have seen this type of scheme before and it can be done in a just manner or a shady way. This one leans toward shady. The more reasonable way to structure is by charging extra override per share on trades done off the algo signals. Or just pay for the signals. And although I am nitpicking, I think you already are noticing the key catch. Why are you required to put up a cap if the algo is so great? What happens when the signals are no good and you take a loss? Where is his risk while he is already asking for an override (on already high rates) and a % cut? One more point. For a serious trader, it may not even be the $25k cap, rates or % split. It may simply be opportunity cost of re-shifting focus from your own already working and potentially growing strategies & styles. The way your friend has it structured, it is certainly NOT re-assuring that the algo signals are profitable, let alone worth the opportunity cost. I thought maybe this guy is looking for some kind of incubation project with experienced traders (to maybe launch a hedge fund), but the structure does not seem to aim in that direction either.
This is a scam. If his system doesn't work, loses are all yours. You are the one who puts up the 25k to trade. why does he get a cut? You are putting up your money to help test his system! he can't lose. Only you can loss!
This sounds very very wrong. First, the lack of automation and the "takes a year to learn" sound very much like it's a subjective/discretionary "system" - meaning not properly a system at all. Not intended as a dig at discretionary, just suggesting that you'd be more investing in a person, not an algo. Second, "$25k isn't a problem for serious traders" cuts both ways - why does HE need to see the money?