Hybrid performance fee model
Blackquant fee structure is inspired by two types of models :
Performance fee model
Credit point system
Similarly to a phone credit system, Blackquant fee structure is working in the same way : the investor buys some credits. Those credits are then consumed when some new profits are generated like in a performance fee model.
The hybrid performance fee model allows customers to benefit from a fair, secure and simple fee model that suits all customer needs, independently from their portfolio size, with all required security and simple enough to be used by everyone.
How does it works ?
The performance fee model is based on profits generated by the algorithm : When the algorithm generates new profits on the investor's portfolio, a fraction of profits are deducted from credit balance. However, if the algorithm under-performs, customers don't pay anything.
"If no profits are generated on our customers accounts, then no payouts for us. Our sole objective is to offer you a profitable and reliable solution"
Mark - Founder of Blackquant.ch
High-water mark
To determine if the algorithm generates new profits on customer's exchange account, the methodology of high-water mark is used :
The high-water mark is the highest level of profits generated by the algorithm for a customer
Performance fees are charged only on profits generated above high-water mark
If the algorithm generated profits, but they are still below high-water mark then no fees are charged
Credit point system
For each $1 of new profits generated above high-water mark (HWM), 1 credit point is consumed on customer Blackquant account. The ratio is always at 1:1.
However, the fraction of new profits collected as credit point, so-called performance fee , depends on which credit package has been purchased : the higher the package is, the smaller the performance fee is :
For example, someone buying a package for 5'000 credits, will pay $899, which corresponds to a performance fee of : 899/5000 = 18%. If the same user would have bought 10x packages of 500 credit points instead, he would end up paying 10x$99 = $999 for 5'000 credit points, which corresponds to a performance fee of 20%.
In other terms, performance fee goes from 20% for the smaller package to 15% for the bigger package.
To have minimal performance fee applied and by extension having a better profitability, it is suggested to purchase bigger credit packages.
Why Blackquant hybrid performance fee model is unique ?
Fair
The integration of high-water mark system in the hybrid performance fee model allows for a fairer method of charging customers as it only charges on the profits above what has been already generated. It is in our own interest to always innovate and generate even more profits through better performing algorithmic trading strategies.
Secured
Traditional performance fee models are requesting withdrawal access on customer exchange accounts, to collect fees when profits are generated.
However, using this method involves a security risk : If someone steals the API key, or if the fund manager has malevolent intents, entire customer funds could be withdrawn via the API key.
To counter this major security matter, Blackquant system does not use API withdrawal access on customer funds to gather performance fees. Instead, a credit point system is used and it consumes credit points automatically when profits are generated on customers exchange account. Thanks to this method, customer funds lay on the exchange account with zero possibility to withdraw funds from API connectivity.
Compounding effect
Traditional performance fee models collect fees directly on the customer exchange account. This method is in favor of the fund manager as it is technically easy to implement but from customer's point of view, a portion of its portfolio is eaten away by collected performance fee. A part of the profits are not reinvested for the next trade, they are collected directly by fund managers.
Blackquant is separating the main customer exchange account and the credit point system. When profits are made on the customer exchange account, the profits are reused for the next trade so the compounding effect is even more powerful.
Using this methodology allows Blackquant customers to benefit from higher net performances, compared to standard fund managers, even though raw performances could be considered as identical.
Example :
Alice starts with an initial portfolio of $ 1'000 on her exchange account
She buys a pack of 500 credit points at $99 for her Blackquant account
The high-water mark is set a $1'000 level
After few days, Blackquant algorithm generates a positive performance of +20%
Alice now has a portfolio of $1'200
The new high-water mark is now set at $1'200 level
Profits generated on Alice's exchange account are : $1'200 - $1'000 = $200
200 credit points are consumed on Alice's Blackquant account
Credit points remaining on Alice's Blackquant account are : 500-200 = 300
A week later, Blackquant algorithm generates a negative performance of -10%
Alice now has a portfolio of $1'080
The high-water mark is still set at $1'200 level
No credit points are consumed on Alice's Blackquant account
Credit points remaining on her Blackquant account are still 300
A week later, Blackquant algorithm generates a positive performance of +20%
Alice now has a portfolio of $1'296
The high-water mark is now set at $1'296 level
Profits generated on Alice's exchange account are : $1'296 - $1'200 = $96, compared to previous high-water mark
96 credit points are consumed on Alice's Blackquant account
Credit points remaining on Alice's Blackquant account are : 300-96 = 204
Few days later, Blackquant algorithm generates a positive performance of +25%
Alice consumes its remaining credit points and reaches a total of 0 credit points on her Blackquant account
204 credit points are consumed on Alice's Blackquant account
Alice has now a portfolio of $1'500
The high-water mark is now set at $1'500
As Alice forgot to buy more credit points, her Blackquant account reaches a total of 0 credit points. So the last position generated +15.7% on Alice's exchange account, instead of +25% if she had more credit points available. The robot automatically closed Alice's position when she reached 0 credits.
To summarize, Alice paid $99 of credit points, and she now has a portfolio account of $1'500. So Alice paid an equivalent of $99 / ($1'500-$1'000) = 20% as performance fees
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