70 CHAPTER ◆ 6 STAGE 0: The Money Document
this may be a quick and dirty route to launching a hedge fund, it is not a foundation for
building a long-term, sustainable, scalable business. If we cannot present a clear, concise
overview of the trading system, it is doubtful we will ever be able to build it.6.1.2.1. Overview
The overview should list the type of trading/investment system (i.e., trigger, filter, multi-
factor), products to be traded, the time horizon of the trades (i.e., intraday, daily, weekly,
monthly, yearly, or to expirations/maturity), minimum and maximum projected invest-
ment capital required, and expected source of investment capital (i.e., proprietary trading,
pension/mutual funds, and/or retail investors).6.1.2.2. Preliminary Research
A preliminary survey of research should discuss similar trading strategies, well-known
research from journals, books, and online resources and show examples of performance
indicators. For example, assuming a product team is proposing a growth at reasonable
price strategy (GARP), this section could include a graph of indicators like average P/E
ratio for GARP funds versus returns. A review of research already done will increase the
credibility of the team.6.1.2.3. Competitive Advantage
This section should convey the expected competitive advantage(s) of the proposed system
relative to competitors and an index benchmark, which should also increase confidence
in the team ’ s ability to deliver a successful system. This section should describe how the
trading system provides better performance by way of higher returns, lower risk, lower
expenses, fewer drawdowns, greater scalability, wider distribution, or even faster tech-
nology. Discussion should also convey, for example, how the team expects to arrive at a
more precise set of factors, or how it will perform the attribution analysis to ensure the
algorithms are adding value. Such discussion will convey a clear understanding of the
strategy ’ s performance and its long-term survivability.6.1.2.4. Performance Forecasts
Preliminary performance forecasts must be realistic, based on, to the extent possible,
annual returns for comparable strategies. If it is a completely new strategy, then conserva-
tive estimates based on what known knowledge does exist are reasonable.
Frank discussion and graphical presentation of investment risk is also warranted,
including expected standard deviations of returns, Sharpe and Sortino ratios, maximum
gains and losses, as well as a display of drawdowns showing the amount of money inves-
tors using similar strategies have lost over, say, a six-month window.6.1.3. The Product Team
The product team writes the Money Document (or at a minimum is heavily involved in
the process). Marketing a new trading/investment system must be an interactive process;