Quant Trading for a Living Lessons from a

Quant Trading for a Living Lessons from a Life in the Trenches (and Other Platitudes) Andreas F. Clenow, Chief Investment Officer

Trading forex/CFDs on margin carries a high level of risk and may not be suitable for all investors as you could sustain losses in excess of deposits. Leverage can work against you. The products are intended for retail and professional clients. Due to the certain restrictions imposed by the local law and regulation, German resident retail client(s) could sustain a total loss of deposited funds but are not subject to subsequent payment obligations beyond the deposited funds. Be aware and fully understand all risks associated with the market and trading. Prior to trading any products, carefully consider your financial situation and experience level. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. The market commentary has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and it is therefore not subject to any prohibition on dealing ahead of dissemination FXCM will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.

The above speaker is neither an employee, agent nor representative of FXCM and is therefore acting independently. The opinions given are their own, constitute general market commentary, and do not constitute the opinion or advice of FXCM or any form of personal or investment advice. FXCM neither endorses nor guarantees offerings of third party speakers, nor is FXCM responsible for the content, veracity or opinions of third-party speakers, presenters or participants.

Now the real work starts Congratulations on your Algo § Having built a robust and well performing trading model is just the first step. § What do you want to do with your trading model? § Get a job? § Trade your own cash? § Start a business? § Pros and Cons with each option Strictly Confidential – Not for distribution or duplication. Not an offer to invest. Risk of loss exist. 4

Two Worlds Amateur vs. Professional § The difference is not necessarily in performance. § Quant vs. TA § Terminology. § Number one differentiator: View on Risk. Strictly Confidential – Not for distribution or duplication. Not an offer to invest. Risk of loss exist. 5

Industry Jobs Pros and Cons with Getting a Job § Safety and stability. § Learn from professionals. § Concentrate on what you’re good at. § Will they steal your code? § Will they let you do what you want to do? § Do job roles in the financial industry live up to pop culture perception? Strictly Confidential – Not for distribution or duplication. Not an offer to invest. Risk of loss exist. 6

The Traditional Way Finding a Job in the Industry § My own approach to entering the financial industry. § Careful research of industry firms. § Custom designed CV and cover letter. § Targeted cover letter to each firm. § Printed on high quality watermark paper. § Binded with gold staples. § Wrapped in plastic folders. § Sent through post. § Large volume of applications sent. § The result? – Not one of them replied. . . Strictly Confidential – Not for distribution or duplication. Not an offer to invest. Risk of loss exist. 7

The Downsides of Trading your own Cash Trading Own Money is a Poor Trade § The dream of the day trader. § No base income. § Taking out cash to live on means reducing your base. § Quest for income leads to excessive risk taking. § Don’t expect every month, or every year, to be profitable. § What is realistic? What can you really take out? What about losses? Year 1 Year 2 • 100 k start • 40% profit • Take out 40 k living exp Year 3 • 100 k start • 20% profit • Take out 20 k living exp Strictly Confidential – Not for distribution or duplication. Not an offer to invest. Risk of loss exist. • 100 k start • 30% loss • Now what? 8

The Benefits of OPM Economy of Scale § Pool the resources. § Get a base fee and a performance fee. § Security means staying power. § Aim for realistic returns – no more urgency for short term income. § Same trading – Lower risk, more stability, longer term potential. Year 1 Year 2 • 10. 1 m start • 20% profit • 100 k management fee • 200 k performance fee • 20 k personal gain Year 3 • 11. 8 m start • 10% profit • 117 k management fee • 117 k performance fee • 12 k personal gain Strictly Confidential – Not for distribution or duplication. Not an offer to invest. Risk of loss exist. • 12. 6 m start • 15% loss • 125 k management fee • 0 performance fee • 20 k personal loss 9

Setting it all up Getting the Pieces in Place § Get independent legal advice. § Decide on type of structure. § Will you manage separate accounts or a collective pool? § Decide on jurisdictions – get legal advice. § Do you need multiple entities or jurisdictions? – get legal advice. § Decide on corporate structure – get legal advice. § Obtain relevant licenses – get legal advice. § Budgeting – Never budget with performance fees. § Don’t forget to get independent legal advice. Strictly Confidential – Not for distribution or duplication. Not an offer to invest. Risk of loss exist. 10

Why doesn’t everyone do it? Why it’s not for everyone § Not wanting to run a business. § Not wanting to risk other’s money. § Not wanting to deal with investors. § Not able to find investors. § Regulations. § Strategy not scalable. Strictly Confidential – Not for distribution or duplication. Not an offer to invest. Risk of loss exist. 11

Trading large amounts can impact results Can Your Algo be Scaled? § Some strategies can be scaled to billions. Other will only work with thousands. § Are you reliant on low liquidity markets? § Is your strategy sensitive to exact execution? What if your slippage goes up? § Does your algo make heavy use of leverage? Is it realistic to assume you can do the same in scale, with real money? § Are you dependent on shorting? Will you be able to locate shares for shorting in size? Strictly Confidential – Not for distribution or duplication. Not an offer to invest. Risk of loss exist. 12

It’s not about aiming for insanely high numbers Are Your Results Realistic? § If your simulations look too good, they probably are. § Everyone has drawdowns. Assume at least twice of your annualized return. § Compounding at over 20% is unrealistic. § A Sharpe over 1 is unlikely. Over 2 is extremely unlikely. § Watch your volatility, watch your skew. § Assume worse results than your most realistic backtest. § Professional investors will not be impressed by a backtest showing 50% annual return at 5% drawdown with a Sharpe of 15. Strictly Confidential – Not for distribution or duplication. Not an offer to invest. Risk of loss exist. 13

Black box approach is dead Can Your Algo be Explained? § Don’t expect to get investors if you are not willing to explain your strategy. § Seed investors will likely want to know a lot. Be prepared to tell them what they want to know. § Your strategy needs a coherent story. Gone are they days when you can just trade around as you please. § Explain what type of strategy you are selling. § What market phenomenon are you taking advantage of? § What makes your approach different, and hopefully better? § Explain the real world reasons for your returns. Strictly Confidential – Not for distribution or duplication. Not an offer to invest. Risk of loss exist. 14

The Value of Building Blocks Is your Strategy Clean? § It is considerably harder to sell a compound strategy. § Combining strategies often makes sense on paper. § Consider the point of view of the allocator. § Often clean building blocks are a better choice. § Let the allocator do the asset mix. Strictly Confidential – Not for distribution or duplication. Not an offer to invest. Risk of loss exist. 15

Honest Presentation Transparency wherever Possible § Be honest about what is backtest and what is real. § Show much capital has been traded and actual results. § Explain strategy and show trade examples. § Show as much data as you can. Daily performance stats etc. § If it’s just you at home with a computer, don’t pretend it’s already an established firm. § Avoid complex ownership and corporate structures. Strictly Confidential – Not for distribution or duplication. Not an offer to invest. Risk of loss exist. 16

The Toughest Part What to Expect from Cap Raising § Everyone hates cold calling. § Nobody likes being signed up to mailing lists without being asked. § Don’t hide your pitch behind corporate newspeak. § Don’t expect to get a ticket – Hope to start a long term relationship. § Get them interested enough to follow your progress. Tickets come later. § Be transparent. Secret black box arrogance is dead in the water. Strictly Confidential – Not for distribution or duplication. Not an offer to invest. Risk of loss exist. 17

Impressions Matter Presenting Your Strategy § Study the Competition. § Research the players in your niche. § Get their presentation materials. § Collect fact sheets. § Learn the terminology. § Follow industry practice for fact sheets and material. § Give a professional impression. § Custom visual design is great, but more important to get all the relevant data in there. § Get the Big Boys’ DDQs. – A wealth of information. Strictly Confidential – Not for distribution or duplication. Not an offer to invest. Risk of loss exist. 18

Presentation Material Do a Monthly Fact Sheet Strictly Confidential – Not for distribution or duplication. Not an offer to invest. Risk of loss exist. 19

Get all the Details Due Diligence Questionnaire § You probably don’t need a DDQ, but you can learn a lot from others. § Often over 50 pages, packed with information. § Sample Sections § Fund Management Company Information § Legal § Performance and Au. M Statistics § Compliance § Investment Strategy § Anti-Money Laundering § Market Risk § Insurance § Execution and Trading § Business Continuity § Operational Risk § Fund Performance § Outsourced Functions § Terms of Investment Strictly Confidential – Not for distribution or duplication. Not an offer to invest. Risk of loss exist. 20

Gaining Visibility Takes Time The Process May Take Time § Be ready for a long process. § Raising serious money takes time. § It’s about building long term trust, and earning it. § In the end, an element of luck may be needed. § All you can do is to increase the probabilities of favorable results, and be ready when the opportunity presents itself. Strictly Confidential – Not for distribution or duplication. Not an offer to invest. Risk of loss exist. 21

Shameless Plugs Andreas F. Clenow § Did I tell you I wrote some books? Strictly Confidential – Not for distribution or duplication. Not an offer to invest. Risk of loss exist. 22