New venture: R2G managed accounts

Models
1

Dear All,

The success of model leasing via R2G has shown us two things:

  • Designers desire to monetize their strategies by leasing them
  • Investors desire to have access to the brain trust of experienced P123 users

However R2G licensing has several drawbacks:

  • Can be too costly for an investor (P123 dues + R2G dues)
  • Still requires trading expertise and time commitment from the investor
  • Not enough incentive for designers to make their best strategies available

In order to solve ALLthese problems we’ve come up with an idea for a new venture. Please see the attachment in this post about AlphaChaser.

PILOT PROGRAM

We reached an agreement with an existing RIA (with all the required licenses) to help us launch a pilot program of this concept. We are looking for:

  • 5 to 10 strategies from designers
  • $1M - $2M investors accounts that will be managed using the strategies (10-20 accounts)

The pilot program will last about 6 months and start in about a month. I will post detailed instructions for investors that wish to participate. In brief it involves opening an account with Interactive Brokers, funding it, and allowing the RIA to direct trades. The RIA will deduct a 2% annualized fee for entering the trades.

Designers who wish to participate please contact me. Designers that contribute strategies for the pilot will be the first choice for when AlphaChaser opens to the public.

Regards,

Marco

AC Exec Summary.doc (77.5 KB)

2

It is interesting. But four major points:

A) Covestor is giving 50% to designers back out of the management fee. That’s way more generous. Don’t forget they have been in business since 2007 and they have about 20M$ AuM at the moment… So the 500M$ back envelope example is not realistic at all. Let’s say I bring the 20M$ and I’m the only designer of AC to simplify and display purpose: This means I only get 100$ per 1M$ account per month? I’m already at 7-8 @ 100/month in less than two weeks with presumed A-not-uM a fraction of that 20M$ with the current R2G setup so it is not very tempting unless you can persuade me otherwise.

B) I think investors wants to decide which strategy they want to invest in. They don’t want to pool in a multi strategy mutual fund. These are my two cents. I may be wrong, I may be right. Therefore Covestor seems like a better idea once again because they can decide which model they want to follow.

C) I think also that by doing this, investors lose the feeling of what’s going on. When I create a strategy, I have investors opening a discussion with me about various parameters and features of my model. This makes an interaction that will not exist with AC. I think this type of bond and customer service I’m currently offering has a good value added. I answer investors about specific questions within a few minutes.

D) I’m not sure if the sum of all Alpha from a bunch of P123 strategies still equals Alpha. In theory it sounds good but in practice it is dubious at best. I think Marco can provide the answer to this. But I personally wouldn’t want to be invested in 150 stocks under 15 strategies that may counter each other. As they say there is always a bull and a bear to make a market. I don’t want my money to sit in both camps or if there is any overlay or divergence across strategies. It’s impossible for all strategies to agree with each other.

Don’t get me wrong. I am supportive of this initiative but I just want to help think/re-think. For now I still think Covestor has a superior service / product. If I was AC, I would mimic Covestor but with the exclusivity of having P123 models. I would sign with you guys anytime if it was the case.

3

Marco - could you clarify #Strategies/#Stocks? i.e. is #Stocks the total number of stocks for all strategies or for each strategy?

Steve

4

It means that there would be 15 strategies and all of them combined would bring a total of 150 stocks. This means an investor would hold an index with supposedly high alpha. Is that possible? Maybe, maybe not. Maybe it will just make a big zero sum game. I don’t have the answer to that. Also there is not even 15 strategies available per tranche at the moment.

5

Q-nomics:

A) Totally different approach with different advantages

To participate in management fees you need to have a series 7 in covestor. There’s plenty of talent on P123 that will never go through the time and effort to get one: individual designers, MBA students, etc. The higher fees in higher stages is a way to circumvent that.

If you have a series 7 there are still a lot of advantages:

  • zero effort once a strategy is built.
  • lower risk of temporary under performance causing redemptions
  • covestor has only $20M in aggregate ? That’s terrible, something is amiss.
  • AC has a large, free source of leads: people that find P123 too difficult to use.
  • Models are protected against a single large subscriber blowing up the bid/ask spreads

Let’s not forget the “good feeling” knowing that you took an investor from 50K to 1M… But all kidding aside:

  • We can add a $5M+ stage with higher fees if needed
  • We will most likely raise funding with priority given to designers. Not much is needed since we don’t have to spend any $ on marketing at the beginning.
  • “Staging” is unique (provisional. patent was filed)

B) The pool of investors that just wants ‘to make money’ is much larger than the one that wants to be actively involved and deal with boat loads of info, which is why the mutual funds biz is so large. Also ‘Learning’ & ‘thinking’ & emotions all hurt. We still belong to the “animal kingdom”, so we much rather use our 5 senses to go though the day :slight_smile:

Have you seen ‘Motif Investing’ ? it lets you change the composition of a Motif with sliders. Why? I have no clue. I don’t want that capability because I have no idea what impact moving a slider does.

C) see B. But also the investor you are referring to is already taken care of with P123 & R2G and probably wants to do his or her own trading anyway.

6

Steve,

It’s just an example. I took the R2G models, grouped them by liquidity, and tested aggregate performances of each stage. All pretty real if you believe in sims (performances in the document are actually under stated). I did take some shortcuts but I think it’s representative. All seemed to naturally fit together.

The purpose of this post is to find designers and investors that want to participate. I will then create aggregate performance results from actual strategies.

7

Q-nomics:

D) there was very little overlap when I combined R2G models.

8

Marco,

As mentioned, I like this - in theory.

Most investors want to be ‘passive’…and want ‘alpha.’

But…I do agree with Quant that the construction of the mult-model portfolio and the systems for allocating among submodels based on trailing correlations and likely ‘risk’ and overlap, is very, very important.

To do this well, you guys have to build the system for managing systems of systems. (And we all want it).

There is a real risk of overdesigning an expensive ETF without this.

I think that can all be managed. CTA’s do this through portfolio level multi-strategy allocation systems.

A few initial thoughts.

I think designers whom you listen strategies from should get the greater of:
a) $XX per sub times number of subs (what you laid out) or b) X% of total AUM for the pool they are managing money from. (Some pro-rate share). This eliminates the issues of having one or one hundred investors in the pool.

I would consider having strategy builders also share in some back-end ‘incentive’ fee for benchmark outpeformance for trailing 12 months.

B.
For the licensing agreement, any model P123 licenses should be licensed for some minimum fixed term. With some guarantees in place. You are asking for exclusivity. Fixed min. term and min. pmt. is common in most licensing deals.

Also, some cash advance is typically common when licensing IP. This is cash against a guaranteed minimum. This was a large part of our old business. This is P123 saying that yes, we will put out money where our mouth is, and we will guarantee some level of AUM raise or else have to pay min’s.

C.
There is the very real risk of P123 taking a hi-performing strategy and just ‘cloning it’ and not paying the designer…either now or down the road. Of course it comes down to trust, but there has to be a better way to protect this aspect.

Right now, most models are protected by the sheer number of models on P123. But, when people turn over best models to you…you can simply resell them without paying designer.

Not sure how to work around this.

Lastly,

What is most important for me right now is for P123 to build shorting into sim’s and models of groups of models.

I do have real concerns that you all are launching another business and this is gonna all vanish for years.

Best,
Tom

9

I think (alot) more due diligence needs to be done regarding this idea. Type in google:Unfazed by declining assets, Covestor has another go with a new CEO.

A) I’m technically a pro because I have masters degree, license, experience, designations but I’m still going on P123 as an individual because I’m paying this out of my pocket and tinkering for fun at home. You can do whatever you want but if you want the real big money to come in, you need experienced designers who can do presentations to institutional clients. Students and alike can’t do this no matter how talented in quant. I have learned the hard way a few years ago when I was a green: if you meet an institutional client and you can’t answer questions like: What are the consequences of QE tapering both in the short/long term, then you are SOL even if you are a good quant - you lose credibility. Therefore you need the background and the experience (most of the time). Marco, if I was you, I would make P123 the quant hedge fund incubator. But it’s up to you, you choose the path that you believe is the best and I’m going to respect your choice.

TBC

10

Tom,

Simplicity is key for many reasons like regulators need to understand it :slight_smile: We’ll see how many designers sign up before making changes

Neither AC nor P123 will never resell/steal IP:

-AC will always license a strategy to benefit designers & investors
-P123 is in the tool biz which is growing and fun

And it would be illegal. I quite like what we’re doing and would never do anything to mess that up.

11

Marco,

Will this be in addition to R2G (will R2G still be available to investors/subscribers) or does AC completely replace the R2G concept?

12

It’s going to be in addition because Marco said on my reply the current R2G system already covers the type of clients I’m talking about (knowledgeable traders / investors).

13

Marco,

It’s clearly your call on all this. And I will still be here using the product.

But…my gut is P123 just has too many businesses right now. And you are trying to launch yet another. Feels like a ‘strategy drift’ issue.

Fund launch is very hard and challenging. You could do it…but it’s a whole new business. Even if it seems ‘easy.’ It’s not gonna be.

Why not just focus on being the best ‘tools’ site in the world. Are revenues growing? Are users growing?

If the money’s there…hire someone to head up a new business of licensing models out to RIA / fund structure. But put strict limits on how much time you can put in…

If not, just keep your head down.

There are a number of things the core users of the site have wanted for years. Just keep building those out.

My $.02.

:slight_smile:

14

I agree with this. Fund launch is hard. It’s not just having a model, it’s being in touch with your potential clients and clients, none of which is possible with this project at first sight. There might be financial planners but they will never be able to discuss or know anything about this project as if will remain a huge black box. Only a designer can sell a model by explaining it just enough so the investor understands what’s going on.

Tomyani I second you. Business strategy drift. There is a good fit between R2G and P123 but the best focus is to enhance the site. Better models will be created which will attract more traffic and subscriptions.

15

Maybe from a designer’s perspective, but their model front runs the customers and so subscriber performance virtually always lags the designer. And many of the designer’s underperform the market.

I think it is an interesting idea to be able to own a collection of top P123 strategies. I am interested in participating as a designer and possibly as an investor.

Don

16

Marco,
If you can post the statistics of what you came up with, it would give a better idea of what to expect. It’s a tought thing to discuss without seeing the product statistics. I just made first glance comments but as more information is provided who knows… Also run a new back-of-enveloppe calculation following a realistic scenario of AuM.

17

This is an excellent idea! I am all in as both an investor and a system developer.

Denny :sunglasses:

18

Tom,
I agree with you.I like this site and hope P123 will not become just site of self promoting black boxes
Emil

19

I agree this is a great idea. I am interested as a designer as well as an investor

TWYWY

20

I agree this is a great idea. I am interested as a designer as well as an investor

TWYWY