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Starting an investment business

Discussion in 'Business, Careers & Education' started by NameBack, Oct 19, 2011.

  1. Harold falcon

    Harold falcon Well-Known Member

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    I'm not a finance expert but isn't this something they refer to as "too good to be true"?
     
  2. NameBack

    NameBack Well-Known Member

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    Oh definitely not. That's the big mistake, right there. No, we built it on a preceding 5-year period. We also validated it back into the past, 00-05, where it earned 650%.

    When we validate it against the same dataset it's built in, it gets a basically perfect fit, so the results are somewhere in the millions of percent, so it's pretty easy to tell if you're validating on the wrong set or not.
     
  3. NameBack

    NameBack Well-Known Member

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    We're sure the returns will go down when rubber meets road, but we're glad that they look this good on paper. And we're confident our methods for backtesting are sound -- no future data seeping into our calculations, taking into account transaction costs, etc.

    It took a lot of work and some entirely ground-up creativity to get the model where it is today. It definitely wasn't validating this high when we started. When we started, it sucked. We just stuck with it.
     
  4. NameBack

    NameBack Well-Known Member

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    Loves crashes. Hates slow steady growth. Performs great in 00, 08, current market. Performs medicore in basically all of the '90s, 2003-2007, etc.

    It still makes money, but nowhere near as much.
     
  5. NameBack

    NameBack Well-Known Member

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    :slayer:


    Yeah we're definitely starting there. Looks like we might be getting 30k (measly for finance, I know) for a test fund soon.
     
    Last edited: Oct 23, 2011
  6. NameBack

    NameBack Well-Known Member

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    Well, right now we're moving ahead with a portfolio simulator to build a track record for when we start trying to raise seed-capital for our first year or two. But once we're raising seed capital, honestly we'll probably be taking any and all amounts. Our plan is to run a small test fund for at least a year (not a huge sample, but a decent size), and use that track record to bring in larger investors going forward. We estimate our first year's operating costs at <$300k, including money for the test fund. But we do need a proper prospectus.

    Edit: As I mentioned above, we may be getting money for a small test-fund ahead of schedule, which we weren't really looking for, but we have someone we know who wants to invest right now, for tax purposes.
     
    Last edited: Oct 23, 2011
  7. NorCal

    NorCal Well-Known Member

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    Dude, I know very little about the nuts and bolts of this business but any results in the 200% or greater range would seem to indicate a flawed algorithm. Nobody is making that kind of money and to think you found the magic beans is a bit silly IMHO.
     
  8. GreenFrog

    GreenFrog Well-Known Member

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    the people at Renaissance Technologies are.

    :slayer:
     
  9. stevent

    stevent Well-Known Member

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    Jim Simons is a baller. But he has gotten 38% annualized returns (since the mid 90s I think) after fees (5%, 36% probably the highest in the industry). Still nowhere close to 200%
     
    Last edited: Oct 23, 2011
  10. NameBack

    NameBack Well-Known Member

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    It's not 200% annualized. Average annualized it's probably about in the 40-50% range -- which is still obviously very high -- because it performs better in these high-volatility markets and then slows down quite a bit when the market moves into a steady bull mode. And again, we do anticipate some falloff from the numbers on paper, just nothing incredibly dramatic. I'd be happy if we ended up doing half that in real life. 100% since 01/10 would be pretty darn nice.

    And, I take your point -- believe me, we've thought about it -- but when you have numbers that validate consistently, that you've error checked, that you've had professionals look over, and that you can replicate across different periods of time, well, what are you supposed to think except that you have something that might work? Certainly I think it's worth the attempt. Of course it could all turn out to be useless and fall apart -- that's the nature of the business.
     
  11. passingtime

    passingtime Well-Known Member

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    Have you factored in fees and slippage? Those can kill you if you are only trading low volumes initially.
     
  12. NameBack

    NameBack Well-Known Member

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    Yeah, it's factored in. We're over-estimating fees, actually. Assuming $14 flat roundtrip, probably gonna use IB and pay more like $2/$4 roundtrip on test fund.
     
  13. NameBack

    NameBack Well-Known Member

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    We might want to tone down our margin estimates, though. We never hold a security longer than three days, and the security it's built on is SPY, so the likelihood of margin calls is pretty low as long as we keep leverage reasonable. Also shouldn't incur margin interest at most places if we keep all positions to 3 business days or less.

    Additionally that means our short positions are also secured and won't be closed out early.
     
    Last edited: Oct 23, 2011
  14. StephenHero

    StephenHero Well-Known Member

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    I'm glad you found a way to put your talents to use outside of DC. Good luck with it.
     
    Last edited: Oct 23, 2011
  15. NorCal

    NorCal Well-Known Member

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    Well, rock on, and if it pays I expect a SF preferred membership in said baller fund.
     
  16. NameBack

    NameBack Well-Known Member

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    Oh there will definitely be an SF preferred investor class. Reduced commission, all kinds of perks (mostly hookers, natch). Especially for fellow CE libs. :slayer:

    And first day of simulation went well, up 1%.
     
    1 person likes this.
  17. BrianVarick

    BrianVarick Well-Known Member

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    Very interesting, I would love to keep track of how everything is going.
     
  18. NameBack

    NameBack Well-Known Member

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    New backtesting results, with a more consistent yield curve, and the decision to look at 3x leveraged ETFs as a trading option has made us decide to move up our real-cash test fund. We're now trying to get it started within a month. Turns out IB lets you margin on 3x leveraged ETFs, so we're going to be switching over. Between the lower transaction costs, higher leverage, and better model, our returns are looking much stronger.
     
  19. scientific

    scientific Well-Known Member

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    so. two bumpkin amateurs, one a recent (reformed?) hippie/commie, the other a statistics phd student who is not alarmed by a perfect fit on his data, have discovered a trading strategy that beats all hedge funds ever, on their first try. stranger things have happened, but not many.
     
  20. Harold falcon

    Harold falcon Well-Known Member

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    [​IMG]
     

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