01 May 2008 Features

 

Pick ‘n’ Mix

Tom Groenfeldt

Multi-asset trading is increasingly appealing to hedge funds and aggressive asset managers.

Hedge funds and some of the more aggressive asset managers are using complex strategies to outperform the markets. Increasingly they are using cross-asset, or multiple asset, strategies that require sophisticated technology to model, price and execute trades.

A fund might be trading cash, equities, bonds, derivatives and property. In traditional systems and firms, each one of the instruments is apt to have its own desk and its own trading system, so a complex trade requires executing a series of trades in as tight a sequence as a firm can manage. Vendors and bankers categorise that as multi-asset, while cross-asset would be the ability to execute the trades all at once.

Kevin Bourne, global head of equity execution trading at HSBC, says that firms don’t even agree on the definitions. Some firms consider using a single FIX gateway for multiple assets is cross-asset. He considers that multiple asset trading means more than simply trading assets against each other. “A bank needs a completely separate business unit for cross-asset class trading. The IT and business structure they have in place won’t let them do this,” he says. “The big challenge isn’t the front end but project offices and enterprise-wide solutions. That is what will drive success in their area.”

Mantara, a new ASP trading technology firm based in Jersey City across the Hudson River from lower Manhattan, offers a comprehensive platform that can execute multiple trades from a single ticket.

Shawn Sloves, Mantara’s vice president of strategy, says a survey of asset managers and hedge funds on the future of trading showed that their top priority was optimal execution. In executing a complex strategy they want to manage one system and one ticket so a trade can be done instantaneously without any slippage.

“With the globalisation of securities trading, siloed platforms will be marginalised,” he says. “During the big swing in the markets over the last couple of months, everyone could see the value of hedging and using derivatives to offset portfolio positions to offset tremendous losses.” Over the next two years, 55% expected to have a multi-asset system on the desktop, he added.

“You can no longer trade single assets in stove pipe systems,” says David Gilbert, chief executive at Mantara. “Hedge funds are leading the effort; they are very aggressive in complex trading strategies.”

Although multi-asset trading has been talked about for years, Mantara has been designed to execute multiple trades off a single ticket – such as an equities pair and then futures and options to hedge it. Mantara can also send the trades to different brokers to hide their trading information from any single prime broker.

“With an older system that started as a single asset class, the silos would have a layer on top to give the appearance of integration, but it isn’t integrated at the data or order routing level, just at the screen,” explains Gilbert. Mantara can route the trades simultaneously and run the risk analytics from a single database.

Another ASP provider of cross-asset trading systems is Sky Road, which supports multi-asset class trading for hedge funds, energy firms and asset managers using Calypso software. It offers to customise the platform to meet the needs of individual clients.

“We are looking at strategies that may require the use of FX, fixed income, equities, credit derivatives, futures and options – putting together all those different pieces to create a strategy,” says John Borse, the company’s chief executive.

Based in Downers Grove, Illinois, Sky Road sees demand from global macro funds which seek to profit from large scale trends between different currencies and the asset classes within those currencies.

The company has clients who are trading FX, fixed income and interest rate swaps, and trying to elicit what is happening in various economies including the relationship between asset classes including gold, silver, futures, equity baskets, equity derivatives, credit default swaps and even individual equities, he adds.

“It is a stark contrast to a long-short equities strategy. They are roaming across asset classes. We think that over time more and more hedge funds will need to work outside a single asset class to do a great job of hedging and coming up with arbitrage opportunities.”

Sky Road also has clients operating multi-strategy funds, which by definition are cross-asset, he adds. They might focus on quantitative stat arbitrage in one strategy and futures trading in another. “What makes Sky Road unique is that we span across all of those, so users don’t feel that they are in a box and will need to move to another software provider if they change strategies.”

In complex strategies, firms are mixing personal trading and algorithmic trading to shift positions.

Eric Karpman, vice president of BNY Mellon Asset Management, speaking at the TradeTech event in Paris last month, says that clients want to take their own ways of trading and use algorithms to execute. For example, firms are using algorithms in multi-asset class portfolios. When they decide to make a change to the portfolio they will use algorithms to execute at least some products. Portfolio changes require particular attention in Eastern Europe and Asia where markets may lack liquidity and transactions costs can be high.

Multi-asset doesn’t just mean equities, fixed income and FX, he adds. It can also refer to equities trading in different markets. Equities trading on the Estonian market and equities trading on a Chinese market are very different asset classes, he says. If a firm has equities from several different markets in its portfolio, it has to adjust its trading strategy for each of them.

Joseph Wald, managing director of Knight Capital, has also seen the adoption of algorithmic trading across asset classes such as FX, options and pairs.

“There is a tremendous amount of new developments and an endless supply of new ideas.”

Some banks are responding to the growth of cross-asset trading with new organisational alignment and technology in prime brokerage and securities serving. JPMC has aligned its equities, futures and options business under one global leader, for example. It has two front end platforms, Extratrade, on over 1,000 desks, and Neovext at 125 client firms – both are multi-asset class and each is adding capabilities from the other.

“As we move forward we will look to rationalise across multiple assets,” says Carl Carrie, executive director, JP Morgan Securities. “Hedge funds are very aggressive in asking for that.”

He thinks that is partly because hedge funds are almost naturally multi-asset since their equities and fixed income trading may reside in the same person, or may be controlled by two people sitting next to each other, unlike the big banks where the desks could be on separate floors.

The challenges of multi-asset or cross-asset trading are not confined to the trading desk, notes Tim Lind, managing director of strategic planning at Omgeo. “We see a much more dynamic mix of securities, and the back office and middle office don’t exist to support the new portfolio strategies.”

It’s not just hedge funds using greater complexity, he adds.

“In 2001 we talked about post-trade derivatives settlement, but we didn’t see a lot of asset managers in that area. Now there has been a revolution in asset management. They don’t just buy and hold. Now they buy and lend, buy and repo. They make heavy use of interest rate swaps and exchange-traded derivatives.”

The increasing sophistication on the buy-side requires asset managers, and custodians, to improve their back office staff.

“The operations people have been transformed from being clerks to being investment professionals,” he explains. “Anyone can trade a security, but it takes real brains to figure out what it’s worth and how to manage the risk.”

Boston, which is home to several of the nation’s largest asset management firms but few brokerages, finds hiring a challenge.

“Trying to find individuals with experience in derivatives is a real challenge here in Boston,” adds Lind. “They are poached all the time. NY has a much deeper pool of investment banks who have been doing this for a long time.”