"Quant Trading for a Living – Lessons from a Life in the Trenches" by Andreas F. Clenow, Chief Investment Officer for Acies Asset Management

Quant Trading for a LivingLessons from a Life in the Trenches (and Other Platitudes)

Andreas F. Clenow, Chief Investment Officer

Congratulations on your Algo

Strictly Confidential – Not for distribution or duplication. Not an offer to invest. Risk of loss exist. 2

Having built a robust and well performing trading model is just the first step.

Three main paths you can take:

Get a job?

Trade your own cash?

Start a business?

Now the real work starts

Amateur vs. Professional


Terminology and Methodology - Quant vs. TA

The difference is not necessarily in performance.

Number one differentiator: View on Risk.

Two Worlds

Pros and Cons with Getting a Job


Safety and stability.

Learn from professionals.

Concentrate on what you’re good at.

Will they steal your code?

Will they let you do what you want to do?

Do job roles in the financial industry live up to pop culture perception?

Industry Jobs

Finding a Job in the Industry


My own approach to entering the financial industry.

Careful research of industry firms.

Custom designed CV and cover letter.

Targeted cover letter to each firm.

Printed on high quality watermark paper.

Binded with gold staples.

Wrapped in plastic folders.

Sent through post.

Large volume of applications sent.

The result?

The Traditional Way

Trading Own Money is a Poor Trade


The dream of the day trader.

No base income.

Taking out cash to live on means reducing your base.

Quest for income leads to excessive risk taking.

Don’t expect every month, or every year, to be profitable.

What is realistic? What can you really take out? What about losses?

The Downsides of Trading your own Cash

Year 1

• 100k start• 40% profit• Take out 40k living exp

Year 2

• 100k start• 20% profit• Take out 20k living exp

Year 3

• 100k start• 30% loss• Now what?

Economy of Scale


Pool the resources.

Get a base fee and a performance fee.

Security means staying power.

Aim for realistic returns – no more urgency for short term income.

Same trading – Lower risk, more stability, longer term potential.

The Benefits of OPM

Year 1

• 10.1m start• 20% profit• 100k management fee• 200k performance fee• 20k personal gain

Year 2

• 11.8m start• 10% profit• 117k management fee• 117k performance fee• 12k personal gain

Year 3

• 12.6m start• 15% loss• 125k management fee• 0 performance fee• 20k personal loss

Getting the Pieces in Place


Get independent legal advice.

Decide on type of structure.

Will you manage separate accounts or a collective pool?

Decide on jurisdictions – get legal advice.

Do you need multiple entities or jurisdictions? – get legal advice.

Decide on corporate structure – get legal advice.

Obtain relevant licenses – get legal advice.

Budgeting – Never budget with performance fees.

Don’t forget to get independent legal advice.

Setting it all up

Why it’s not for everyone


Not wanting to run a business.

Not wanting to risk other’s money.

Not wanting to deal with investors.

Not able to find investors.

Regulations.

Strategy not scalable.

Why doesn’t everyone do it?

Can Your Algo be Scaled?


Some strategies can be scaled to billions. Other will only work with thousands.

Are you reliant on low liquidity markets?

Is your strategy sensitive to exact execution? What if your slippage goes up?

Does your algo make heavy use of leverage? Is it realistic to assume you can do the same in scale, with real money?

Are you dependent on shorting? Will you be able to locate shares for shorting in size?

Trading large amounts can impact results

Are Your Results Realistic?


If your simulations look too good, they probably are.

Everyone has drawdowns. Assume at least twice of your annualized return.

Compounding at over 20% is unrealistic.

A Sharpe over 1 is unlikely. Over 2 is extremely unlikely.

Watch your volatility, watch your skew.

Assume worse results than your most realistic backtest.

Professional investors will not be impressed by a backtest showing 50% annual return at 5% drawdown with a Sharpe of 15.

It’s not about aiming for insanely high numbers

Can Your Algo be Explained?


Don’t expect to get investors if you are not willing to explain your strategy.

Seed investors will likely want to know a lot. Be prepared to tell them what they want to know.

Your strategy needs a coherent story. Gone are they days when you can just trade around as you please.

Explain what type of strategy you are selling.

What market phenomenon are you taking advantage of?

What makes your approach different, and hopefully better?

Explain the real world reasons for your returns.

Black box approach is dead

Is your Strategy Clean?


It is considerably harder to sell a compound strategy.

Combining strategies often makes sense on paper.

Consider the point of view of the allocator.

Often clean building blocks are a better choice.

Let the allocator do the asset mix.

The Value of Building Blocks

Transparency wherever Possible


Be honest about what is backtest and what is real.

Show how much capital has been traded and actual results.

Explain strategy and show trade examples.

Show as much data as you can. Daily performance stats etc.

If it’s just you at home with a computer, don’t pretend it’s already an established firm.

Avoid complex ownership and corporate structures.

Honest Presentation

What to Expect from Cap Raising


Everyone hates cold calling.

Nobody likes being signed up to mailing lists without being asked.

Don’t hide your pitch behind corporate newspeak.

Don’t expect to get a ticket – Hope to start a long term relationship.

Get them interested enough to follow your progress. Tickets come later.

The Toughest Part

Presenting Your Strategy


Study the Competition.

Research the players in your niche.

Get their presentation materials.

Collect fact sheets.

Learn the terminology.

Follow industry practice for fact sheets and material.

Give a professional impression.

Custom visual design is great, but more important to get all the relevant data in there.

Get the Big Boys’ DDQs. – A wealth of information.

Impressions Matter

Do a Monthly Fact Sheet


Presentation Material

Due Diligence Questionnaire


You probably don’t need a DDQ, but you can learn a lot from others.

Often over 50 pages, packed with information.

Sample Sections

Fund Management Company Information

Performance and AuM Statistics

Investment Strategy

Market Risk

Execution and Trading

Operational Risk

Outsourced Functions

Get all the Details

Legal

Compliance

Anti-Money Laundering

Insurance

Business Continuity

Fund Performance

Terms of Investment

The Process May Take Time


Be ready for a long process.

Raising serious money takes time.

It’s about building long term trust, and earning it.

In the end, an element of luck may be needed.

All you can do is to increase the probabilities of favorable results, and be ready when the opportunity presents itself.

Gaining Visibility Takes Time

Andreas F. Clenow


Did I tell you I wrote some books?

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"Quant Trading for a Living – Lessons from a Life in the Trenches" by Andreas F. Clenow, Chief Investment Officer for Acies Asset Management