Quality Money Management : Process Engineering and Best Practices for Systematic Trading and Investment

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trading groups, but in small firms the costs are borne directly by traders. With $2.5 mil-

lion in trading capital, a 50/50 split with the trading house, and $10,000 in expenses per

month, a trading team would need to return 50% annually to generate just a little over the

$500,000 cash flow. While $2.5 million is not a lot of capital, the 50% rate of return will

not likely be sustainable, nor would it likely be scalable should the management or other

investors be interested in investing $25 or $100 million.

TABLE 6-2

Capital $33,333,333

Fees 1%

Performance incentive 10%

Cash flow $500,000

TABLE 6-3

Capital $2,500,000

Return 50.0%

Profit split 0.5

Expenses/month $10,000

Cash flow $505,000

So, with the large amount of investment capital needed, the product team must plan

for how they intend to generate such an amount prior to obtaining seed capital. If the

team cannot raise the capital itself, then they will need to find someone who can, and sell

that person on the strategy.

Once a primary distribution channel is chosen, we recommend the product team

decide on a second choice channel. The product team can then design the system and

create a marketing plan to offer the system through two channels. For example, a system

that implements a long–short strategy intended as a hedge fund could be designed for

easy conversion to a long-only strategy and marketed through a mutual fund distribution

network. Consideration of an alternative distribution channel also mitigates personal risk,

where the loss of, say, a primary sales contact or other avenues of access to an investment

pool would otherwise negatively impact success.

Lastly, while business people in other industries (namely technology) think about how

best to sell out their businesses to larger firms, very few in financial markets think about

the opportunities to sell their trading/investment strategies and systems to other firms.

Larger firms often wait until trading/investment systems are in the growth or maturity

stage before they buy smaller businesses. The product team considers targeting external

buyers of the business in addition to external sources of investment capital.

6.2.3. History of Investment Cycles

Styles of trading and portfolio management come and go as market conditions change.

The growth versus value research is an example of changing investment cycles.

Launching a fund or trading system of a particular style when that style is losing or is

6.2. MARKET ANALYSIS