The anatomy of an ML-powered stock picking engine
Someone asked about how difficult it is to get outside investment....<p>It's usually very difficult and it takes a lot of money to run a proper fund.<p>Let's say you raise $50M.  You can maybe charge 1 and 20,meaning you get 1% of assets each year for running the fund and 20% of profits.<p>1% of $50M( and keep in mind this is a large raise for someone without a track record on the sell side or inside another fund) give you $500,000 a year to pay:<p>- salaries( lets say you pay yourself $100,000 all in plus the same for a single analyst<p>- a Bloomberg terminal $30,000 including data feeds<p>- market data feeds you need $25,000/year for basic market data and fundamental data that you are allowed to warehouse(you can't store data you get from the Bloomberg terminal).<p>- rent $50,000/year for office space<p>- outside lawyer fees and outside accounting fees $100,000/year<p>- similar fees for someone to run your back office, roughly $100,000/year.<p>And on the other side of expenses you have the money making side of things.  Which as the OP pointed isn't great.
If you return 10% on the 50M you get to keep 20% of that so a 10% return gives $5M in profits and you keep $1M.<p>That allows you to bonus out yourself and analysts on good years.  If you lose money one year then you get no bonus and have to bonus out the employees out of the retained earnings you kept from previous bonuses.<p>it usually gets worse as most funds have what's called a high water mark.  This means you don't collect the performance fee until your fund gets back to the high water mark. So if you are down 10% one year you need to make that back before  you start to make any performance fee, which is why most funds shut down if they go down more than 20%.<p>As to raising money.....Anyone can show a model that makes money.  that doesn't mean its easy to create a model, its just that there are alot of people capable of building such a model.<p>Its the risk management that people with money are really looking for and sadly that's just really hard to show out of a model as part of the risk management is things like positions sizing and showing your model doesn't pile into one asset class or trade correlated products.<p>it bodes well for the OP that they talk about market regimes as, IMHO, this is one of the biggest risk management tools that aspiring traders ignore.<p>And this risk management is why people ask for a track record of more than a year.