I would like to share with you a summary of what I have learned (and confirmed the knowledge I had) when building my own international hedge fund.

1. You need to reconcile with technical challenges

One of the most frustrating things I have encountered when creating my own hedge fund is the fact that there is something constantly malfunctioning. The technical equipment brings new challenges and even though I work with a team of excellent computer professionals, there isn't a single day without an error that needs to be fixed. The technology used for our hedge fund is really complex and challenging and, to my surprise, the process of fine tuning is as time demanding (or maybe even more) as the programming of all applications and algorithms. This is something, I wasn't ready for and I was hoping that now when Elon Musk can repeatedly land space ships, it won't be so difficult to make a couple of programs work together and assure that they all do what they are intended to. Well, I have learned a lesson:)

Now I mention this point because sometimes I get an "anxious" email from one of my students that somewhere, somehow, an unexpected issue has just occurred and something that should have happened, didn't happen.

There is just one thing I can say about it - you need to accept that as part of ATS trading. Just as there are some features on my brand new (and expensive) car that sometimes don't work, there are also some technical challenges and weak moments in automated trading. In the past, I have lost some money due to these issues. Sometimes, I have "earned" by missing a trade that would have ended in a loss. But overall, due to these technical issues, I lost money. Still, I am here and trading. We live in a world where even an iconic iPhone isn't flawless - so don't expect that ATS trading will be without any technical issues. We have chosen a business where these things occur from time to time.

For me, the biggest lesson I have learned is: dedicate 2-3x more time for each step, to test and tune the programs, codes, technology, as these are all real, significant, challenges.

2. It is possible to build an interesting ATS for every futures market

This point is more positive - thanks to fully automated workflow, we manage to create a potentially interesting, strong and robust strategy for any future market. In some markets (like FESX) we are struggling with too low avg. trade value, and in others (like US T-bonds) with the fact that even a single tick of slippage (that has a value of 32 USD), can really affect the live trading results - and therefore in some markets, you need to be really patient. There is one market that, due to the transaction costs, we keep failing in - and that is Nikkei (NK). But even here, we don't give up:) Overall, we are doing pretty well in metals (GC, SI, HG) and also in energies (CL, NG,... ). Even grains are suitable, but you should be careful here. Due to the recent general fundamental changes you need to build a system that trades both long and short. It is really a must. Furthermore, you should look for systems with symmetric results (i.e. long side has similar results to the short side).

3. You really need swing strategies in your portfolio

It is a fact. You can build an interesting and high-quality strategy for almost any futures market, but you cannot do it without swing strategies. For some markets, it is impossible to build an interesting intraday strategy. To reach higher diversification, swing strategies should be part of a portfolio. There is one more thing that needs to be considered for any hedge fund - there will be really big positions traded, which means that average slippage will be more significant (positions will be filled gradually at different prices) and therefore you should have really high (resp. adequate) avg. trade value. Solely for this reason, it is a necessity to include swing ATS. But this applies also to smaller accounts (not only to hedge funds) when you want to be really diversified.

Good news is that it is not so difficult to build swing strategies and when you already have the workflow, the process isn't too much different from building intraday ATS. The workflow is the same, you only need to change a couple of details and experiment more with different approaches.

4. Hedge funds cannot be built and launched by a single person

You really need a team. Our fund consists of a 5-person team and I think that it is a bare minimum. The fund is such a demanding and complex entity, that really requires a team of specialists with specializations in different areas and you should leave the details up to them. Otherwise, it will drive you crazy. In our case, I have two highly talented programmers (one C#, JAVA, C++, great database skills, etc., and the other mostly JAVA, great database skills; both having really deep insight in trading, both live ATS traders, and both having, of course, top EasyLanguage and TradeStation knowledge), one person focusing on client acquisition and law, one person for customer service, execution and overall CTA management, and myself - the author of all ideas and algorithms, also being a "General Manager". The workload is constantly enormous and the first steps are really not simple, specifically to get it all running (especially when experiencing endless technical challenges). You really need to be enthusiastic about it, be passionate about it, and have the will to complete this challenge as you really need a lot of energy to complete such a demanding project. The good news is that it is possible - everything is possible when you follow your goals. Yes, in our case it has taken longer than I have expected, much longer, but on the other side, we won't miss anything. The opportunities have always been here and they always will be - every day. It is important to have really robust and solid foundations (which is also something I teach in online courses).

These were today's suggestions and observations. I have learned, of course, a lot more than that - some of which I share with you in this series.

Tomas Nesnidal is a European trader and developer, with 10+ years of full-time trading experience. You can download an example of his strategy for FREE on his blog http://www.SystemsOnTheRoad.com.

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