Advantages and limitations of auto-trading

Inspired by Marco’s view of auto-trading
([url=https://www.portfolio123.com/mvnforum/viewthread?thread=6418#30974]https://www.portfolio123.com/mvnforum/viewthread?thread=6418#30974[/url]), in particular this Point: “- allow the designer to set a maximum portfolio size per Investor” I had following thougts:
This is suboptimal, because,

  • if one assumes that each sub invests the maximum permitted value, but on average much less is invested, all seats may be filled, but the tradeable volume may not yet be reached.
  • if you base on a fictional average of Investment / Sub, it can go wrong the other way.

Will say: the optimal measure for the usage of capacity of a port is not the number of Subs but the invested capital / max. investable capital.

Therefore, with auto-traded R2G-ports not the number of free seats, but the still investable capital should be specified. Each Sub should then pay in proportion to the capital invested by him to the max. investable capital at the beginning of the month. That is a “fair” fee: Then small Investors have not to pay for the profits of big accounts and then no one can fill a R2G-port for a small fee.

This concept requires a clear distinction between automatic and non-automatic R2G-ports, i.e. the provider must decide, whether he offers a port exclusively for Auto-trading or not for auto-trading.

The Provider should determine a fee for the filled auto-port, which is not limitated.

Matthias

All,

Would the SEC still put this is in the same category as a “newsletter?”

Regards,

Jim

No way this is a newsletter with managed accounts. Autotrading turns these into managed accounts.

Also…it’s not about trading max. liquidity today…it should be about defining and trading towards max. liquidity after a few years of ‘average’ organic growth - and then disclosing likely fall off in returns as AUM rises.

That’s why, on simulated models, should require providers to disclose AR% and stats under multiple liquidity constraints.

A great CTA doesn’t close to new money additions when they already start having returns suffer and performance lag. They close a few years in advance allowing the fund to ‘grow’ to the max. capacity organically. I have been part of this. And have kept money with those CTA’s because they felt like they were looking out for me. This goes along with the community notes about forcing R2G providers to alert Sub’s to % of total assets they have in a model…and providing alerts if it changes. Once these are managed accounts, some of this can be verified by P123.

I think P123 and the R2G builders are addressing max. total strategy liquidity in a much too casual manner. I see model providers claiming that they can sell low liquidity (i.e. $200k daily total liquidity) models to 15-20 sub’s here (and sometimes selling the same models to more on other sites). It’s not possible to run these models as is, if sub’s are putting in real money. It feels either amateur or deceitful.

There are models that already appear oversubscribed with no organic return growth assuming $50k / sub amounts. And providers don’t know how much sub’s are investing. Maybe more. Maybe less. What happens if their out-of-sample performance holds for 1-2 years…my bet is they go from modestly oversub’s to WAY OVERSUBB’d.

:slight_smile: