P&L Report Card
We have noted in these pages before how the hedge fund industry – with its myriad models – has been at the centre of the banks’ move to cut the client tail. For those funds that do not see FX as a source of direct Alpha – they still want to make money off their FX trading if they can of course – there has not been much difference. For those global macro players, who are having such a rollercoaster existence, however, the story, is different.
The fact is that hedge funds get to where they are by being very good traders, which means they don’t leave much Alpha on the table, and as the banks have moved more towards the broker model – especially with their hedge fund clients – so they have focused less on functionality for this segment.
There are exceptions of course, and a good prime brokerage business helps the banks maintain a decent relationship with some funds. Equally, and again this is a mantra from this year’s awards, a good set of analytics that help an already good trader make more informed decisions, will always go down well.
The hedge fund client segment is one that is not seriously impacted by the changing conduct regimes of the banking industry – yes there were inevitably one or two “superstar” sales people who would try to help with a little bit of market colour that, pun intended, pushed them into a grey area for conduct. There were also some who went out of their way to improve the execution at the expense of their own trading desk, but overall those days are long gone.
In some ways this shift has weeded out some weaker links in the hedge fund space that relied upon tips regarding market action, and that is no bad thing. Unfortunately, current market conditions, with random volatility and an equally volatile macro and geopolitical environment are starting to impact on many of those remaining in the game.
Which all leaves us with a smart, switched on, client segment, seeking good information that they can leverage using their own skills and insight to create a strategy, that in turn they can execute in even the toughest conditions. Times may be tough, but better analytics and data are the lifeblood necessary to turn performance around, and the banks are starting to provide it.
It is, in many ways, the perfect scenario for these customers – although some of the bigger players may be a little disillusioned they no longer get some of the perks and, euphemistically, more “in-depth” market information, they used to.
For the savvy hedge fund manager, however, the FX world, in terms of the services and products available on single dealer platforms, is as good as it has been.
Probably the biggest move this year has been from Citi in terms of banks looking to build (or re-build) a serious hedge fund portfolio of clients and once again this move has been led by the control functionality that Command Centre provides, although the enhanced content delivery mechanisms and analytics have also helped.
Deutsche Bank remains strong in this category and is clearly looking to go the next leg and seriously enhance its prime brokerage business, which means it could well be worth watching even closer.
Hedge fund managers spoken to also like how their PB service is backed up at BNP Paribas and UBS by improved execution capabilities and again we must give a shout out to Morgan Stanley, a firm that also seems to have made some good ground in this segment over the past 12 months.
Winner – JP Morgan
So to summarise, a hedge fund manager wants deep liquidity, excellent execution tools, including flexibility around how they operate, preceded by excellent content and underpinned by a strong prime brokerage and clearing business. Step forward JP Morgan.
An important addition in the last year to the bank’s offering has been a control centre that allows hedge funds to permission their staff with certain access to particular information.
This is not innovative, of course, but it did represent a gap in JP Morgan’s service to hedge funds last year – one that has been adequately filled. The bank also supports third party mapping, so hedge fund clients – who rarely deal in one place – can have control of their business with more than one provider, without having to have multiple “control centres” operating.
Hedge funds also like the idea of JP Morgan’s axes on options, where clients can click to open the axe and access an immediately executable price. So much of what hedge funds do is opportunistic and that means they appreciate alerts when such opportunities to trade at slightly better than market arise.
Ultimately though, this is about execution, execution, execution. Hedge fund managers spoken to name JP Morgan as the most consistently best pricer among banks on the street and the work the bank put in some years ago to ensure it had a robust pricing and risk framework is paying off with the respect of what remains a very tough group to deal with.
Throw in Algo Central, which we have already discussed, and hedge fund managers ought to be in heaven – they claim to be the best in the business, now they have more powerful tools than ever that allow them to express that.
If we view hedge funds as the most professional of traders when it comes to the customer base, then we would be very surprised if some of the larger players in particular, with their concerns over market impact, do not reconsider their decision not to cosy up to the banks. And if they do, then JP Morgan should be their starting point