how to start a hedge fund quant trading business by ernie chan

How to Succeed in Quant Trading Business with a lot of trying

Ernest Chan, Ph.D.QTS Capital Management, LLC.

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B.Sc. (Physics, U of T) Ph.D. (Physics, Cornell)

IBM Research (Statistical pattern recognition, NY, 1994)Morgan Stanley (Data mining, NY, 1997)

Cumulative Profits = N/ACredit Suisse (Stat Arb, NY, 1998)

Mapleridge Capital (Futures, Toronto, 2002)Millennium Partners (Stat Arb, NY, 2003)

Maple Securities (Stat Arb, NJ, 2003)Cumulative Profits < -$2MM

E.P. Chan & Associates (Everything, Toronto, 2006)EXP Capital Management (Everything, Toronto/Chicago, 2008)

QTS Capital Management (Forex, Niagara-on-the-Lake, 2011)

Cumulative Profits > $2MM

About me

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Quantitative Trading blog epchan.blogspot.com, 2006).

“Quantitative Trading” book published by John Wiley & Sons, 2008.

Ongoing workshops in London, Hong Kong, Singapore.

Along the way …

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“10,000 hours of practice is required to achieve the level of mastery associated with being a world-class expert” – Malcolm Gladwell

1998-2007: after about 10,000 hours of trading research and practice, I finally reached consistent profitability!

The 10,000-hour rule

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Learn from others:◦ Blogs, books, papers, magazines, online forums◦ Partners, clients (!), spouse (!)◦ Readers (!)◦ Workshop participants (!)

Emotional detachment from daily profits. Look for fundamental principles of financial

markets◦ E.g. mean-reversion and cointegration,

seasonality at different time scales, Kelly formula, linearity, etc.

Key ingredients

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Most importantly:“Make things as simple as possible, but not simpler”

-Albert Einstein

Key ingredients

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Ideas generation◦ Mainly from the aforementioned sources!◦ The easiest part!

Backtesting◦ Choose a suitable platform for yourself.◦ Be aware of numerous pitfalls such as data

snooping bias, look-ahead bias, survivorship bias, noisy/erroneous data, etc.

Paper trading ◦ Which platform allows you to fully automate?

Key ingredients in details

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Live Trading◦ Always starts small.◦ Position sizing, capital allocation, and risk

management using Kelly formula.◦ Beware of execution costs.

Continuous improvement and refinement of strategy.◦ Improvement in strategy and/or execution

technology.◦ Can have dramatic impact on returns and Sharpe

ratio!

Key ingredients in details

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Your own savings should be the seed capital.◦ No pain no gain!

Friends and family?◦ Would be better if they are familiar with trading.

Proprietary trading firms◦ May impose too many restrictions.◦ May not allow full automation.◦ May be a good source of start-up capital.◦ Profit share goes from 10%-100%.

Raising capital

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Starting your own fund.◦ Aforementioned PR is very helpful.◦ Investors always approach me, never the other

way around.◦ Finding a good lawyer is important.

Raising Capital

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Through email: ernest@epchan.com Through my blog: epchan.blogspot.com Through my website: www.epchan.com

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Keep in touch!