3 Ways The Buy Side Can Improve Fund Performance
This is not an advisory piece on what to invest in but rather an examination on how to exact your investments more efficiently and cheaply.
1) How much do you spend to maintain trading applications in-house? Why not outsource your trading platforms and hardware to your software vendor? Qualified people needed to manage servers, software, networks, hardware, disaster recovery, etc. are expensive and may not be the most efficient use of your firms resources. Many Independent Software Vendors (ISV) offer “Software as a Service”. That is to say the ISV affords access to a comprehensive trading solution “out-house” that leverages infrastructure, data centers, networks and high quality data services generally at a lower cost than supporting this “in-house”. You will also gain access to brokers through these solutions to boot.
2) How are you managing the trading process? Portfolio Managers (PM) tend to have a macro view of the investment process divining alpha gains over time where as the trader or broker who implements the trade has a micro view of the investment horizon. A closer working relationship between trader and PM on the timing of trades with the goal of capturing short term alpha at the point of execution could vastly reduce the cost to trade.
3) How good is your traders/brokers execution? Are they simply receiving the order and completing it without the best interest of the fund in mind? Or perhaps the tools such as the algorithms available to them, while allowing them to trade more names efficiently, may not be not be of high quality. Are you using Transaction Cost Analysis (TCA) to drill down to find out which traders are better or which algos complete order more cheaply? If you are not you should be. Transaction Cost Analysis measures trading costs at several points along the investment process giving you a granular view of where trading costs are being incurred and the ability to improve them.
Incidentally, AsiaEtrading.com is running an Opinion Poll that asks: “Does Your Firm Use Transaction Cost Analysis (TCA) To Measure Execution Performance?” Please vote HERE
Saving costs along the trading process will improve fund performance in both absolute terms by retaining more wealth in the portfolio and in relative terms when compared to peers within the same risk profile who are not so focused on the costs of trading.