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Top 11 tips of partnering in a hedge fund

(Last Updated On: July 19, 2015)

Top 11 tips  of partnering in a hedge fund

After posting this on hedge funds,

What I need to see to colloborate in a hedge fund

The following 11 points are gold which is why I love this community you are all part of!

From a fellow newsletter subscriber:

 

Bravo for turning away capital. Dead serious. If you’re not willing to risk 100Mil of your own capital, don’t risk others. Kinda in the same boat, I have a skill set, probably similar to yours, that attracts a lot of money.  But I’ve yet to trade others capital. Why? I’m not ready ish… And I’ve been trading for at least 10 years now – pretty profitably. And, shit, been writing software since the early 90’s. <- end of my back story, don’t want to bore you.

My advice is completely unsolicited and simply opinions based on nothing.. sorry, had to qualify that.

Regarding your hunt for a hedge fund partner, here are a few thoughts. And questions I would have to have answered before forming any partnership. I know you’re a busy man. But here is a list of 10 things your partner must posses.

1. First and foremost, enjoy the persons company. Agree on at least 63.2% of everything. Quant strategies, movies, music, hibachi, whatever.

2. Can you personally convince, an interested partner that you have, not only the technical ability to design and implement hi-end trading software/strategies, but also the possess the business acumen to run a successful hedge fund. I.E, Can you pass every FINRA exam? Are you a broker/dealer? Ask them to build a server to run HFT strategies. 3. You’ll have to open your books, literally, detailing every trade you’ve made proving historical success. You obviously have a solid track record or you wouldn’t be getting offers of millions of dollars to trade with. If anyone does not ask you to do this, walk away. 4. Kinda goes along with #3, but how long it took you/they to get out of the red once you became a professional quant. What firms have you worked for and how much money have you managed. What’s your lifetime trading profit?

5. This may sound odd, but make sure they have wiped their account completely at least 2 or 3 times. You’re not a trader until this happens to you. Hopefully early in their career and no more than 50k. Beyond that they’re manic and irrational – not good for business.

6. What kind of hedge fund? Broad term. I’m guessing a prop quant firm, which means — you’ll have to thoroughly vet the technical abilities of anyone interested. They should know more about quantitative finance than you. And that’s not an insult in any way, I have no idea what you know … but personally, I choose to always make a concerted effort to work with people who know a little more and it’s paid off tremendously. Now I work alone for the most part and send long emails after a 12 hr trading session.

7. how deep is their level of understanding designing (not programming) theoretical and statistical hft models. How do they hedge? arbitrage, options, indexes ect… and under what circumstances would you do each? As a hedge fund, how do you plan on managing long and short term trading? Oh, make sure they don’t trade Forex. Futures, Options and Equities only. If they must trade currency, use the future 6’s. Otherwise you’re just looking to widdle your account away. <- personal bias only, ya may be a brilliant forex trader, I’ve just never met one.

8. must get technical. Yea, check out their existing code, but challenge each other with a tangible project. For example (and I’m using this only because I wrote this recently) ask them to program a simple indicator that predicts the Holt Moving average 10 bars out. And to kill two birds with one stone, ask them to 1. Choose between an Armia and a Garch stat model to perform the predictions – and NO MATLAB for this, they should know how to write these simple auto-regressive model. (if they choose Garch only, that’s instant disqualification as they don’t know what you’re asking, if they integrate the two – one for the conditional mean and the other for variance, a powerful combo, you’ve got yourself a candidate – on the math side at least) 2. Ask them to write a simple GA to optimize the p,d,q. 3. Integrate it into an automated strategy. From just question 8, you got, “this person understands how to program simple quant models, they know a little bit about statistics and at least a rudimentary understanding of ML. And if they are a DSP programmer or a Physicist, that’s a major plus.

9. Only partner with a discretionary(manual) trader if they are a multi- multi millionaire. Otherwise, business could be over before it starts with a few erratic and emotional days. I’ve seen this happen. sad.

10. wow…I could go to 20. but I’ll stop. Last thing[s] – make sure they’re more than just one-off strategy designers. I mean, you have to design a living platform that can manipulate params genetically based on price action –  i.e dynamically adapt to market conditions, must support multi instrument/ Multi time series structure(bar) & time frame  – non linear is what I’m saying. Automatically hedge with every trade..ya know. A real system. Oh, not gonna put this on a #11, but it’s the most important, have them explain their philosophy behind risk management, how they implement it, and they code they use to ensure that risk profile.

11. Dammit. Gotta do 11. Make sure most of their strategic analysis /code is geared toward the EXIT and MANAGEMENT of the trade. As you well know, that’s how you make money.

Business plans and trading ideas will come naturally if you’re both able to exceeded the expectations above. I guarantee it.

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