The advice that I have for traders that are looking to trade institutional money is…

1. First, be aware that institutional money trades differently than we do. Most of the strategies we trade, they cannot trade because the ticket size is too big. Like our trend following system, which works very well because we can trade a lot of small cap stocks, it doesn’t work for the big money. If you have 10 million to 50 million assets under management, which you kind of need so your hedge fund can cover their expenses, it won’t work. Then when you apply the trend following system, like the Freight Train for example, on only larger mid-caps, it looks good, but not exciting anymore. Thus, be aware of what is tradable for the big guys, and what can I trade, and do I have to go for the big guys, or does it really make sense trading my own strategies, maybe for a signal provider where people can copy my strategies?

I am basically the hedge fund; people invest in me. There are a lot of providers, especially for the US market, which do that. That can actually be more beneficial. Also, it helps you to build a track record, which is recorded by a third party, and that makes you way more interesting. You need to have a track record recorded by third party and see, how does the strategy work in a different environment? Let’s say, relative momentum and rotational strategies work very well for the Russell 200 and NASDAQ 100, the last years, extraordinarily well, this year not so good. I started this year, and you’re immediately in a drawdown, and what do you do? You keep doing, because you know this drawdown is normal. The market environment doesn’t really support the system type.

You need to be aware of what you’re doing, what are the weaknesses of this strategy set, how you can make money with this strategy, and what kind of market environment. The big guys or professional guys know this. If you have a strong momentum strategy and it went through the roof this year for the gas market, they get suspicious probably because the main market is not that good. It’s like a couple of stocks which bring all the big entities upwards, so you need to be aware of this, and they are aware of this.

2. Second, some institutional investors think they know what they’re doing, but they have no clue about systematic trading, so be aware who do you get into bed with. Do they actually know what you are doing? Because otherwise you get a problem, once your performance does not meet their expectations, they’re going to wean with your process, they want to change your process, they want to cap down the risk, and then you have to get into this argumentation explanation, and this takes a lot of energy and emotional energy and confidence, and then you may be even convinced to change your risk management.

Suddenly the strategy goes up again, but you don’t take the full upside potential because you managed down your risk. You need to have a certain confidence. Even the guy with whom I traded, when they had big investors, he said, sometimes I wish I hadn’t even started this because it takes so much nerves. If I just trade my own portfolio, I know what I’m doing, I know what my risks are and I’m confident in it. It’s nice to upscale it, but you open a whole lot of other doors. Be aware of this.