The Origin Story

Howdy Everyone!

As you are aware, every Wednesday, we send out the STP Algo Trader User Blog.

The idea is to have an active user of the system share their experiences and how they are using our algorithmic trading system Signal Trader Pro to MAKE MONEY.

Since we are still in beta mode, the first two series of the Trader User Blog were contributed by two of our team members who are active traders using the system – James Welch and Jessica Cadby.

Today, we are kicking off the third series with the co-founder and co-creator of Signal Trader Pro – Enrique Abeyta. Me.

If you are reading this newsletter, you are likely familiar with my background, so I am not going to spend too much time introducing myself.

I am going to tell the story of how we (co-founder Mark Intrieri and myself) found our way to creating Signal Trader Pro.

The story begins with the first hedge fund where I was a partner, Stadia Capital, losing our biggest investor back in 2004.

Two partners and I founded Stadia in March 2001 with just $550,000 in assets under management. We worked hard AND smart, and by 2004, we had over $1 billion in assets.

At that point, we were one of the 100 largest long/short hedge funds in the world!

We posted strong performance in our first three years, but in 2004 our performance began to struggle. Although we were not losing money, we certainly were not keeping pace with the stock market.

It also felt very different internally at the fund.

For the first three years, it felt as if we had caught a wave and were successfully surfing it. The start of 2004 felt like we were swimming against the tide.

At the end of the first quarter, we remained positive for the year and continued to acquire new assets.

In mid-April, though, a bomb dropped.

A Chicago-based institution that managed money for some of the most prestigious institutions in America (college endowments, pension funds, etc.) called us up and said they were going to pull their money in a few months.

Not only were they one of our three largest investors, but they were also one of our favorites.

Unlike almost any of our investors, when we visited them, we always felt we were learning something about the markets and how to improve our process. Their redemption shook up the partners and me.

We scheduled several calls with them to try to understand why they were pulling the money. They were polite and did the calls but didn't provide us with any insight.

Essentially, the hedge fund equivalent of "We have just decided we are going in another direction."

We didn't grow from $550,000 in AUM to over $1 billion in three years by simply accepting what anyone told us, though, and I booked a flight to Chicago. Then, one day, I simply arrived in their offices unannounced!

(Mind you – we did some back-channeling to make sure that the key partner would be there. Do the research…)

I arrived at the office and spoke with the receptionist, who then called the partner. After about 30 minutes, he came out with a funny look on his face.

He knew me well, so not only was he not surprised I showed up like this, but he was amused. This tenacity was one of the reasons he had invested with us in the first place.

He made the necessary comments about how this was all out of the ordinary but said he would sit down with me in an hour or so. He also said he would gather up his “quantitative” team and bring them in.

That word – "quantitative" – is now in common use in the investment management business. Back in 2004, though, it was pretty rare, especially in the fundamental long/short segment where we operated.

An hour later, I sat down in their conference room overlooking Michigan Avenue and the Chicago River with him and three members of their team.

They proceeded to walk me through a series of analyses showing how our fund was making (or losing) money.

Now, this was information that I thought we knew quite well.

We had brought my best friend (and master programmer) Mark Intrieri on as a consultant soon after starting the fund to create “attribution analysis.” We wanted to know which traders were making money and in which positions they were doing so.

What these folks showed me, though, was something different.

They conducted a straightforward analysis known as a "frozen state" analysis.

This involved taking our portfolio at the start of a period – a month, three months, six months, and a year – and then examining how it would have performed if we had done NOTHING.

Not a single trade.

Then, they compared this performance to how we ACTUALLY performed.

The numbers were stunning. …and disappointing.

The reality was that our ideas were great, but our trading was terrible!

The "frozen" portfolios put up performance that easily outperformed the stock market in both up and down markets.

The actual portfolios, though, were struggling. It was clear that whatever active trading we were doing was hurting our performance.

The meeting took only 90 minutes but changed my life as an investor and trader.

We didn’t end up getting the investor back into the fund, but what they shared with me inspired me to step up our focus on the “quantitative” side of the business.

Although I had been a numbers guy all my life, the real beginning of my journey began there on the banks of the Chicago River…

Next week, I will share how I utilize the system daily to find ideas.

One last thing – have you ever run a “frozen state” analysis?

If not, I HIGHLY encourage you to do so. Simply take your portfolio snapshots, freeze them, and look to see how you would have done if you had not traded at all versus your actual performance.

The results might surprise you…