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How to start a hedge fund quant trading business by Ernie Chan


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How to start a hedge fund quant trading business by Ernie Chan
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How to start a hedge fund quant trading business by Ernie Chan

  1. 1. Ernest Chan, Ph.D.QTS Capital Management, LLC. 1
  2. 2. 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 < -$2MME.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 2
  3. 3.  Quantitative Trading blog, 2006). “Quantitative Trading” book published by John Wiley & Sons, 2008. Ongoing workshops in London, Hong Kong, Singapore. 3
  4. 4. “10,000 hours of practice is required to achievethe level of mastery associated with being aworld-class expert” – Malcolm Gladwell1998-2007: after about 10,000 hours oftrading research and practice, I finally reachedconsistent profitability! 4
  5. 5.  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. 5
  6. 6.  Most importantly: “Make things as simple as possible, but not simpler” -Albert Einstein 6
  7. 7.  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? 7
  8. 8.  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! 8
  9. 9.  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%. 9
  10. 10.  Starting your own fund. ◦ Aforementioned PR is very helpful. ◦ Investors always approach me, never the other way around. ◦ Finding a good lawyer is important. 10
  11. 11.  Through email: Through my blog: Through my website: 11