Redwheel’s head of trading explores the evolving relationship between PM and trader, the importance of delivering the right information, and the increasingly sophisticated skillset needed to support fund managers effectively.
What’s your background at Redwheel and how have your PM relationships changed over time?
I’ve been here over 13 years now, initially in a single strategy (a European long/short team) which was very one-on-one, as the dedicated trader for a PM with a bank of analysts. As Redwheel evolved to a more long-only business and wound down some of the long/short strategies, they centralised the trading desk and asked me to head that up on a global basis. That became more about supporting all the different strategies at the same time – so in terms of the relationship, I’ve seen it from both angles: first dedicated, and second more general. However, the main theme is always the same – client delivery, and getting the best outcome for the client. You have to make sure you do what you say on the tin. That’s the way we invest as a house – and then how do you go and execute that in the most efficient way? It’s about knowing the market and knowing what PMs are looking for, so you can best support them in delivering their strategy for the client.
How can a trader make a difference to his PM’s alpha?
I think there are several areas where we can help make a difference, all being driven by understanding the investment philosophy of your PMs. The primary is advising on execution strategy and this can range from the appropriate pre-trade analysis, flagging where natural liquidity has been of late to highlighting index related flows or actively bidding and offering of stock your managers have been recently trading in. Then there is information surfacing, such as results, micro or macro news events or placing and IPOs. In all of these areas when the PMs and trading teams are in harmony there is greater trust and (all things being equal) better outcomes for the fund and clients.
If you look at what’s happened over the last few years, an industry-wide trend has been the increased onus and accountability on PMs – whether it’s more client calls or more regulatory and compliance requirements – it all means less time dedicated to looking directly at the minutiae of the market. They’ll still be reading the notes, talking to analysts, talking to the sell side, but that market-facing element has been constricted somewhat and that’s where we can be the eyes and ears of our investment teams. We want to understand what they’re looking for – is it micro news, macro news, liquidity situations or solutions? Is it advice on the best approach, is it going for the local line or using an ADR? The calls on their time are greater, so we try to do some of the heavy lifting by facing the market and acting as a sieve to sift out what’s relevant and what’s not.
There are five of us on the desk and we cover 22 hours a day, and occasionally Sundays! We have one trader in the Singapore office that covers Asia, then four of us in London, three covering the European shift and one covering the US. We’ll always fill in for each other – when the Asian trader is off, for example, someone always gets up at midnight to cover.
It’s about knowing what the fund managers want – a lot of our EM and frontier strategy AUM is based in China, Hong Kong, Taiwan and Korea – we could say “OK sorry, no one is going to work those hours, we’ll just leave it to the brokers overnight and come back and check on the fills in the morning”. But that’s not the way our operation works, we understand what our fund managers need, what our clients expect, and as a result we’ll make that sacrifice.
That suggests quite a high touch approach – how does that dovetail with the move towards low touch and workflow automation?
It goes back to what kind of strategies you’re looking after. For us, one of our largest is emerging market and frontier, and that will lean more heavily on a high touch relationship. But even if the execution is low touch, the delivery of the news might still be more high touchy. In a lot of emerging markets there is no access to algos at all, so everything is high touch and you have to speak to the traders more.
On the more developed strategies, on the execution side, that’s generally more low touch – and to a certain extent on the slower moving funds the news element is also lighter touch. The PMs don’t necessarily want to know every piece of macro news compared to a faster moving strategy. It’s really about knowing what your PMs are looking for, building that trust, and then delivering it to them.
How is the skillset for traders changing? As head of desk, what are you looking for in your traders?
I think it’s evolving. Again, it depends on the type of strategies you’re servicing, but a lot of the core skills remain unchanged: numeracy, interest in the market, a drive to succeed. The tech savviness is definitely the area that has evolved the most – understanding how the algos work, understanding TCA with its conclusions and so on. But even with all of that, I don’t think you can underplay the crucial importance of being personable – being able to communicate well with different managers, understand what they’re looking for, and then deliver it back to them.
You’ve also got to be able to talk to the sell side in a way that builds up a stronger relationship and make sure that when you do ask them for something, they look after you. If you’re looking at a more quant role than maybe the cold hard numbers are more important, but in my eyes, in terms of what we see on our desk, we definitely want to tick all those boxes on both sides of the equation.
How is T+1 in the US going to affect you?
That is really front and centre for us. On 6 March we actually transitioned our UCITS funds to a shorter settlement cycle, from T+3 to T+2. The thought process there is that as the US trading settlement cycle shortens we think there will be a mismatch with the fund process and hence think it’s important we reflect this in fund settlement. Since Q3 last year we’ve been monitoring affirmation rates at brokers and making sure we are fit for purpose and ready to transition.
Having a trader around until US close does also help in making sure those trades are ready to go on T+1 rather than waiting until the next morning. Plus, that handover to the Asian desk also leaves us some time, because if there is any issue then the Asian desk can pick those up with any of the brokers that haven’t matched trades ahead of the new cut off deadlines.
What else is on your radar for the coming year?
AI is a big issue for us, of course, and staying on top of what’s happening in that area. Then related to that, one of our key priorities is information surfacing. We’re covering a lot of different strategies and different fund managers, so one of the things that’s very important for us is to be able to surface relevant information quickly – keeping abreast of any tools that are out there that will help enable that. Events like TradeTech are a good time to get to see vendors and understand what they’re offering and how that might help workflow and help us to evaluate the liquidity landscape better.
Another key issue is TCA. Often the PMs will defer it to us and just trust that it’s being looked after, and we’ll present the findings to them if there is anything of concern. But I do think it’s one of the elements that is now primarily entrusted to the trading world. There are very few fund managers that get involved with TCA reports or want to understand that microstructure in more detail.
That brings us back to the original point of PMs having more and more demands on their time, so they’ve had to delineate and delegate this to us, unless there’s a problem. For us though, it takes up a portion of every day (we screen for outliers, we screen how we’ve done participation wise and whether we need to follow up on anything with the broker) – it’s embedded in the process now and it’s part of the daily life of the trading desk.
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