It is good to be back writing to you after a much needed break.
2017 was an action packed year filled with lots of stuff taking place in the background. Rest assured we have taken major steps forward in building a robust infrastructure and a platform that really honour’s our slogan to Identify and Develop Trading Talent. In addition we have in place an excellent strategic partnership with Axitrader a broker who shares our vision and is determined to become the No 1 broker in the world for all the right reasons. Watch this space the best is still to come…..
I am super excited to announce the launch of the AxiSelect allocation program for incubating emerging fx traders. The format of this letter will be in the form of the memo I submitted to our strategic partners to get this program off the ground. It will read a little longer than my typical weekly newsletter but I feel it is important to provide a transparent understanding of the motivation and thought processes behind the program. I urge you to read the letter in full. Before I get to the memo I just want to say that I have been a professional trader for more than a decade and a manager of trader incubation programs for more than 5yrs and this is the most excited and confident I have been in all my career. Throughout the development of this program, I have put myself in the shoes of the trader looking for capital. I truly know what its like, it can be so frustrating when you have produced remarkable returns but cannot raise money simply because you don’t know the right people. I know what its like to be rejected because you are based in a country that doesn’t have the “correct” investment profile for meaningful investments. I also know what its like on the other side to be a gatekeeper for allocators of capital. I know how hard it is to decipher which of the traders presenting fantastic profit returns are lucky and which traders have an edge and are likely to be able to repeat their past success.
Together with my trusted co-founder Vlad, the PsyQuation team and our strategic partners at Axi we truly believes we have in place a program that will meet the objectives of the majority of those traders committed to become full-time traders. We know there will certainly be many cases where traders do not progress through the full program and end up losing money. This is unavoidable but we are confident that we have already attracted enough talent to our PsyQuation community to ensure the program has the best chance of producing an excellent risk adjusted performance.
AxiSelect managed by PsyQuation
There are 3 phases to the AxiSelect program, the 1st phase “Incubation” is purely quantitative, short in duration with a small capped $ amount. It is designed to make the process of receiving an allocation for the trader as transparent and immediate as possible. It matches the traders deposit 5x but is capped at US$10k with a minimum 1 full calendar month of observation before being recommended for the next phase. It is designed to demonstrate quick unbiased inclusion and progression, but is capped at a size that keeps financial exposure small so that both parties have time to “get to know each other”. The 2nd phase is the “Accelerator” phase which sees AxiSelect match the traders account equity according to an acceleration multiple. This phase is conditional upon the trader coming through the Incubation phase, even if the trader is a star. The final “Professional” phase is when a trader has passed through the initial incubator and accelerator phases, it is at this point that we feel confident to market our Pro traders to our collective investor network. To get to the Pro phase requires a minimum of 3 months in the AxiSelect program. It is our experience, backed up by research, that an FX trading account really needs to have a minimum of 1yr trading to materially shift the probability of likely future trading from random luck to predictable success.
I believe it is really important that we build a process that is transparent and seamless. It is extremely frustrating for a trader who meets all the quantitative criteria, which are not insignificant, to be excluded because he or she doesn’t satisfy a subjective interview process. It is also frustrating when you are keen to get going to be told sorry you just missed the Investment Committee meeting because we meet ad hoc, therefore you need to wait until we decide to meet again. I believe we will create tremendous goodwill in the industry with an automated initial process. Assuming we get it horribly wrong the semi-worst case scenario is that we allocate $10k and our 10% stop loss for the month is invoked, thereby risking $1k for each trader we make a mistaken allocation to. We have also insisted that the trader dictates the pace of their capital acceleration by depositing an initial amount of capital they are comfortable with to get the incubation started. This we believe is a very fair way of asking traders wishing to partner with us and ensuring that they have some “skin in the game”. It is a well known psychological phenomenon that providing traders with a free option of managing other peoples money without any financial consequence leads to excessive risk taking.
We know that during the Incubation phase we are likely to encounter miscommunications, underperformance and rogue traders with tremendous style drift. It has happened quite often in our experience that a trader given an allocation with risk management drawdown criteria screws up the volatility of their Master signal account causing the Slave account to be stopped out due to increased volatility simply due to an operational error.
In order for us to get 3rd party funds for our traders we need to have demonstrated that we have a product up and running, we have corrected unforeseen mistakes and that we are prepared to put our money where our mouth is. This requires a pipeline of traders for our “Pro” allocation business so that we can build a first class optimized portfolio blend and also be confident in recommending who we believe to be our stars for direct investment. It’s my (Michael Berman’s) job to get as close to the managers as possible to understand where their issues are and how they are responding to the stress of managing other people’s money. This will become increasingly important when clients money is on the line, so I will be this conduit and will lean on other experts like David Hobart and others where necessary. As a professional trader and fund manager and someone with a good understanding of psychology I usually know how much space to give a trader and when to become more involved by asking difficult questions. I believe this function can also be proactively enhanced by further investing in our traders and ensuring they are working regularly with a peak performance trading coach, such as David Hobart.
The next section will deal with the different phases in more detail.
PsyQuation has automated the AxiSelect incubation filter whereby traders wanting to check if they qualify and/or wish to enter the program can do so with the click of a button by visiting the allocations section of our site. If a trader gets a green light by passing the 3 quantitative filters then the trader will receive an email with instructions how to go about setting up an account with Axitrader, together with a profit share management agreement and will be prompted in due course to complete an online questionnaire providing a brief bio and description of the traders strategy and rules around risk management.
During the Incubation phase we will cap Axi’s contribution to a maximum of US$10k. The 5 x multiple of whatever the client deposits will apply as usual but will be capped at this phase to a maximum Axi allocation of US$10k. For example, if the client deposits $1k, Axi will match it with $5k. However if they deposit $5k Axi will only allocate $10k during the Incubation phase. A client can always deposit however much they want, we don’t ever want to stop someone from depositing larger sums, for instance $50k, but in this case the trader will know explicitly that their initial allocation from Axi will be capped at $10k.
Traders can join the program at any time of the month. However, the period a trader will be in Incubation is a minimum of 1 full calendar month. If a trader joins the Incubation program on say the 5th of September they will need to remain in the Incubation program until the 31st of October before they are eligible to transition to the Accelerator. They will not be put to the Investment Committee’s September meeting as they do not have 1 full calendar month. The AxiSelect Investment Committee can override this rule on an exceptional merit basis.
The 2nd phase is called the “Accelerator” phase. This phase will see the Axi cap of $10,000 per trader lifted and the accelerator multiplier kick-in according to our formulae. This becomes effective only once the Axi investment committee approves the transition from incubation to acceleration.
The Investment Committee will meet on the last Thursday of every month to discuss the Incubation accounts that are being put up for transition to Acceleration. Michael Berman will prepare a board pack that includes all the traders’ history prior to incubation as well as a report on their performance during the Incubation phase, often inexperienced managers do silly things with the added attention so we want to have a formal report on this transition period. In addition the board pack will include a condensed report by David Hobart that drills into a qualitative assessment around the traders “edge” and “risk management”. David Hobart will meet with the traders who are on track to go from Incubation to Acceleration, via Skype, for a 30 minute assessment relating to how they answered the questions in the questionnaire. He will probe the trader from a qualitative perspective for strengths, weaknesses and inconsistencies around these questions.
This report will not be the definitive yes or know on whether the trader will transition from Incubation to Acceleration as the whole idea behind the Allocation program is that it is predominantly a quantitative process, but this report will be a factor in the Investment Committee’s decision process. We see this program like baseball and big data. Its all about the ability to see lots of data and our proprietary filters probable edge. The larger the sample size the more we skew the program to our advantage.
The 3rd and final phase is the “Pro” phase. This phase will see us market the trader for 3rd party investment once our investment committee has approved the transition. For as long as a trader is in the Pro phase we will use the full Axi and PsyQuation network to promote the trader.
Action from the Trader to get funded
The trader will need to open and fund an account with AxiTrader to be eligible for an allocation. Some candidates will already have accounts with Axi and will be able to use their existing account as their initial contribution for inclusion into the AxiSelect program. Traders without an Axi account will need to open a new Axi account and will be able to use their account history from another broker for an allocation assessment. PsyQuation will migrate the account history from another broker into the PsyQuation account that the trader opens and trades at Axitrader as the Master signal account. The reason for this is because we need to keep tracking your PsyQuation Score (it plays a major role in getting into and staying in the program) which requires your history. From experience we have seen traders continue trading their original accounts with another broker and the new Axi-Master account totally differently; going forward we need one source of truth for assessing trader performance and this is our process. This is how it will look, all very seamless and we do not preclude you from continuing to trade your original account.
We put a questionnaire to our community late last year asking how they would like the allocations to work in practise. Should we put money in the traders trading account and enter into a legal partnership agreement or should there be a Master account (traders investment) with PsyQuation taking care of copying the signals from the Master account into a Slave account (Axi’s account now and 3rd party investors in the Pro phase)? The overwhelming response was in favour of the signal copy solution, so that is what we have put in place which has been running for the past 8 weeks.
The performance fees are paid quarterly, 2 weeks after each calendar year quarter: March, June, September, December. The fees are subject to a high water mark, the trader receives 20% and PsyQuation 10%. The calculation process has been semi-automated by PsyQuation and will shortly be fully automated with traders able to see what their accrued performance fees are from all the different investments.
PsyQuation has already built a reporting portal for the allocated traders to observe the performance of their Master and Slave accounts. This portal is currently being prettied up and will soon be available to all our traders in the AxiSelect program and shortly thereafter to Investors in the Pro phase. The idea is to provide a fully transparent view of the amount of money being invested as well as a clear picture of what performance fees are accruing to the trader and also for the investor to be able to see what his or her after fee returns look like.
I see this reporting capability serving 2 clear functions. I believe traders need to be like golfers and learn “course management”. If you have had a terrific quarter and the date is 24 December, is it really necessary to trade the last few days of the year and risk giving up all your profits in an illiquid mostly random markets? You will be better placed to make these decisions with the PsyQuation reporting tool. From an investors point of view, there is nothing worse than thinking you have have made all this money by viewing profits before fees, only to see a sizeable deduction after the fees are paid to the managers. Having a transparent reporting system helps avoid these issues and we think PsyQuation will be one of the few reporting platforms that provides accurate after fee performance reporting with daily performance fee accruals.