4 Lessons I Have Learned From Launching My Own Hedge Fund

4 Lessons I Have Learned From Launching My Own Hedge Fund




In the first article of 2017, I would like to proportion with you a summary of what I have learned (and confirmed the knowledge I had) when building my own international hedge fund.

1. You need to reconcile with technical challenges

One of the most frustrating things I have encountered when creating my own hedge fund is the fact that there is something regularly malfunctioning. The technical equipment brings new challenges and already though I work with a team of excellent computer professionals, there isn’t a single day without an error that needs to be fixed. The technology used for our hedge fund is really complicate and challenging and, to my surprise, the time of action of fine tuning is as time demanding (or maybe already more) as the programming of all applications and algorithms. This is something, I wasn’t ready for and I was hoping that now, when Elon Musk can repeatedly land space ships, it won’t be so difficult to make a associate of programs work together and assure that they all do what they are intended to. Well, I have a learned a lesson:)

Now I mention this point because sometimes I get an “eager” email from one of my students that somewhere, somehow, an unexpected issue has just occurred and something that should have happened, didn’t happen.

There is just one thing I can say about it – you need to accept that as part of ATS trading. Just as there are some features on my brand new (and expensive) car that sometimes don’t work, there are also some technical challenges and ineffective moments in automated trading. In the past, I have lost some money due to these issues. Sometimes, I have “earned” by missing a trade that would have ended in a loss. But overall, due to these technical issues, I lost money. nevertheless, I am here and trading. We live in the world where already an iconic iPhone isn’t flawless – so don’t expect that ATS trading will be without any technical issues. We have chosen a business where these things occur now and then.

For me, the biggest lesson I have learned is: dedicate 2-3x more time for each step, to test and tune the programs, codes, technology, as these are all real, meaningful, challenges.

2. It is possible to build an interesting ATS for every futures market

This point is more positive – thanks to fully automated workflow, we manage to create a potentially interesting, strong and strong strategy for any future market. In some markets (like FESX) we are struggling with too low avg. trade value, and in others (like US T-bonds) with the fact that already a single tick of slippage (that has a value of 32 USD), can really affect the live trading results – and consequently in some markets you need to be really patient. There is one market that, due to the transaction costs, we keep failing in – and that is Nikkei (NK). But already here, we don’t give up:) Overall, we are doing pretty well in metals (GC, SI, HG) and also in energies (CL, NG,… ). already grains are appropriate, but you should be careful here. Due to the recent general basic changes you need to build a system that trades both long and short. It is really a must. Furthermore, you should look for systems with symmetric results (i.e. long side has similar results to the short side).

3. You really need swing strategies in your portfolio

It is a fact. You can build an interesting and high-quality strategy for almost any futures market, but you cannot do it without swing strategies. For some markets, it is impossible to build an interesting intraday strategy. To reach higher diversification, swing strategies should be part of a portfolio. There is one more thing that needs to be considered for any hedge fund – there will be really big locaiongs traded, which method that average slippage will be more meaningful (locaiongs will be filled little by little at different prices) and consequently you should have really high (resp. adequate) avg. trade value. Solely for this reason, it is a necessity to include swing ATS. But this applies also to smaller accounts (not only to hedge funds), when you want to be really diversified.

Good news is that it is not so difficult to build swing strategies and when you already have the workflow, the time of action isn’t too much different from building intraday ATS. The workflow is the same, you only need to change a associate of details and experiment more with different approaches.

4. Hedge funds cannot be built and launched by a single person

You really need a team. Our fund consists of a 5-person team and I think that it is a bare minimum. The fund is such a demanding and complicate entity, that really requires a team of specialists with specializations in different areas and you should leave the details up to them. Otherwise, it will excursion you crazy. In our case, I have two highly talented programmers (one C#, JAVA, C++, great database skills, etc., and the other mostly JAVA, great database skills; both having really thorough insight in trading, both live ATS traders, and both having, of course, top EasyLanguage and TradeStation knowledge), one person focusing on client acquisition and law, one person for customer service, execution and overall CTA management, and myself – the author of all ideas and algorithms, also being a “General Manager”. The workload is regularly enormous and the first steps are really not simple, specifically to get it all running (especially when experiencing endless technical challenges). You really need to be enthusiastic about it, be passionate about it, and have the will to complete this challenge as you really need a lot of energy to complete such a demanding project. The good news is that it is possible – everything is possible when you follow your goals. Yes, in our case it has taken longer than I have expected, much longer, but on the other side, we won’t miss anything. The opportunities have always been here and they always will be – every day. It is important to have really strong and substantial foundations (which is also something I teach in online courses).

These were today’s suggestions and observations. I have learned, of course, a lot more than that – some of which I proportion with you in this series.

Have a great start of 2017 and happy trading!




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