I have had the privilege of working with many great Portfolio Managers (PMs) in my career. I have worked with some not so great ones also, but that is a topic for another time. Each manager has their own quirks and ways of doing things that contribute to their success. Even within a given style, long-short equity, macro, algorithmic etc. there is more than one way to skin the cat and some styles work at certain times and not at others. This forms part of the “edge” that we often hear about in marketing pitches.
Having worked at very large institutions, I can safely say I was sheltered from a lot of elements that actually were crucial to the running of a business. If you are a portfolio manager within an institution, I can say this probably applies to you also. It may sound cliché but working for yourself is one of the hardest things that you can do and very little you do can prepare you for the challenges you will face. Having the right people around you will contribute to your success and make the transition from a large-scale enterprise to a standalone boutique much easier.
“Supun, can you please sell 100m USDILS for me” is something I have heard multiple times in my career. The order seems simple enough and may have come from an idea that I pitched, research that an analyst did for the PM, or the PM’s view on central bank policy for example. However, when I receive this instruction, I think there are several elements embedded in it.
- Manage the trade with minimal price impact. What bank has access to local flow? Is it a Friday when Israel local is closed making the trade harder to execute? Is the PM aware of this?
- Roll the trade to a forward date that makes sense. Is this bound by trading policy or should certain dates be avoided? How does the rolling of the trade affect the horizon of the idea? If it is a 1-year trade and the cost of carry is cheap, then do we roll it straight to that date or roll more regularly?
- Let me know when you think I am wrong. Maybe this is a hard stop in the market or perhaps the PM wants colour on flows and headline coverage to let them know if the thesis may be changing.
- Is this the most efficient way to express my idea? Perhaps there is a more asymmetric way to do this trade that provides the exposure? Through options maybe? How does this compare to the forward trade?
- Make sure that the trade can be seen the way I want in my reporting. This means the trade needs to be booked accurately and fed into the reports that the manager looks at. There must be a smooth flow between front office, back office and IT infrastructure to ensure that this happens. This involves co-ordinating with the street as well.
- Deal with any administration around the trade. Any settlement issues are kept away from the PM and dealt with by the back and middle office with assistance from the trader where necessary.
Many PMs are either not interested in answering the above or just do not have the bandwidth to deal with the intricacies around a trade. In some cases, there is a genuine lack of awareness that such issues exist as they have always been handled by someone else at their firm. This is a simple example of some of the issues or questions that can arise. As trades become more complicated the list of things that need to be considered only grows. So, the instruction sell 100m USDILS is more complicated that it initially seems.
At Quay Partners, the trading desk has over 15 years of experience trading across asset classes and geographies. We are used to trading for multi-billion-dollar portfolios as well as startup funds. When an order is received on the desk, we think laterally about all the issues that can arise and are not shy to engage with the Portfolio manager to arrive at solutions and alternatives if need be. We have the confidence to act with discretion when required. Our job is to ensure that the PM’s ideas are executed in the market in the most efficient manner with minimal issues.
If you are thinking of spinning out of your existing shop or are thinking of starting up on your own, talk to Quay to see how we can free up your time so you can continue to sharpen your edge. If you are considering working for yourself, then clearly you want to spend your time focusing on what you want to and not what you have to. Speak to us to see how we can help you with this.
To learn how Quay Partners can guide your business to success, contact us for more information.
Quay Partners Group delivers bespoke investment management solutions to independent hedge fund managers and family offices.
Supun Ekanayake, Partner, has over 15 years’ experience in trading hedge funds.