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.
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.