Rapid reaction force(3)

One has to be very careful to determine what is truly alpha enhancing. It was one of the questions raised at the head traders' summit: is there truly alpha in an asset management environment?

By None

One has to

be very careful to determine what is truly alpha enhancing. It was one of the

questions raised at the head traders’ summit: is there truly alpha in an asset

management environment? I think there is and as the integration of hedge funds

into the overall portfolio construction process matures, you’re going to see

more active, tactical trading occur on the buy-side trading desk.

How do you

expect the dialogue between traders and portfolio managers to change as the

trader’s skill-set rises?

In my

opinion, we’ll see a ‘backward integration’ of the trading function into the investment

management process. One of the big drawbacks of a blend between portfolio

management and trading and the so-called segregation of duties is the fact that

there could be favouritism in terms of who’s getting the trades from a broker point

of view. In other words, is there manipulation on the allocation? That problem

was solved when unbundling was enforced. If you have unbundling, you’re

compelled to provide best execution and get the trade done at the best price.

You can no longer prevent a trader from dealing with a shop because there’s an

allocation limit.

With the

segregation of duties consigned to the past, the next step is to start to ‘backward

integrate’ the dealing team into the portfolio management process. The depth of

knowledge of traders has increased over the past three to four years, slowly

but surely evolving into what I call a ‘tactical asset manager’. The conversation

between the execution side and the portfolio management side needs to be active.

The trader needs to understand the portfolio manager’s mindset in terms of

their valuation: why is the portfolio manager seeing value in a given stock?

What are the basics around the valuation? What are the factors from a quant

perspective driving the stock over the short to medium term? What’s the technical

analysis like? These factors are evaluated before the investment decision is

made; and once the trader has pushed into the market, there has to be constant

communication to ensure you’re executing in a way that is still worthwhile.

How much leverage

should the trader have over the portfolio manager?

Over the

past two years we’ve evolved dramatically. When I joined the firm, execution

was based on strict limit prices and orders were just pushed into the market.

Now when we get an order, the trader will go through the liquidity analysis of

the stock, have a discussion with the portfolio manager to give him a feel for

the volume going through the market, and offer an opinion on how to access the

liquidity as efficiently as possible. A very big part of an institutional

trader’s job is finding liquidity. Getting the stock at the right price is one thing;

in our market just getting the stock is another. It’s not a simple job.

Eugene GoosenYou’ve gone on record as saying that the biggest headache the buy-side

trader faces today is information overload. Since this is likely to get worse

as a result of the regulatory push for increased transparency, how do you

resolve this problem?

In a recent

presentation from a data vendor we looked at a simple issue like news filtering.

What the trader has to do is be more and more focused and do proper filtering to

make sure that what’s coming through is relevant. If you’re busy trading on Anglo-American,

for example, you need to have a blotter open that will feed news of Anglo-American

or related industries as you set it up.

The first

answer to the question is that it requires a technological solution. It’s not

dissimilar to algorithmic trading in that respect. Algorithms help us execute better

by taking some of the load. Secondly, there’s self-discipline. You have got to

be able to filter relevancy and become IT-savvy – understanding how your data

feeds works, how your blotter needs to be set up and what graphical displays

are important to you. If your information systems are set up properly you can

eliminate 80% of your information overload.

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