74 CHAPTER ◆ 6 STAGE 0: The Money Document
out of favor can lead to failure. Launching a large cap growth fund, one of the oldest
and most consistent strategies, in 2000 would have been extremely difficult, regardless
of the merits of the strategy itself. Investors were just not interested in large cap growth
in 2000. By reviewing investment cycles, the product team should be able to gain insight
into the demand for the particular type of risk and, furthermore, the amount of time it
has to launch in order to ensure a favorable environment. If a system will take a year to
design, test, and build and the market cycle is three years into what is expected to be a
four or five year trend, the product team must consider the potential of launching in a bad
environment, making it much harder to raise investment capital.
As a rule of thumb, we caution against launching a trading/investment system at a
time when the rolling cumulative returns for the benchmark over the past 12 months are
down. You will likely be fighting against the odds for investment capital. Under these
conditions, a strategy will likely have a difficult time generating a year-to-year track
record of positive absolute returns. Investment advisors, pension fund boards, brokers,
and trading firm managers have nothing to gain by placing money into new strategies in
underperforming asset classes or strategies.
An analysis of the history of investment cycles should at a minimum include a graph
of the returns for the past five years, the track records of comparable systems including
drawdowns, and if possible the number of competing systems and how many have started
and closed in each of the past five years.6.2.4. Competition
In this section, the product team will list all known competitors with an overview of their
individual strengths and weaknesses, and moreover, how its own trading/investment strategy
will beat the competition. A discussion of major competitors can include the amount
of capital allocated to competitors, long-term return history, the growth or reduction in
the number of competitors, reference materials such as marketing documents, research
reports, Morningstar reports, and the like.6.3. Request Seed Capital
This section may be the most important piece of the Money Document. A request for
seed capital must clearly articulate the purpose of the proposed business, along with the
initial amount of seed capital the product team requires to enter Stage 1 of our develop-
ment methodology. Key points are● Proposed initial funding to build a prototype.
● Proposed time to build a prototype.
● Minimum/maximum amount of money to manage.
● Deliverables for the next step.All trading/investment system design and development projects that expect to receive
seed capital must have clearly defined goals that will be reviewed by a management or
investor committee. A review committee will make sure that the product team has com-
pleted a proper Money Document and that the proposed trading strategy is understood, at