December 02 - 03, 2020
Highlights from Main Conference Day 2
Buy Side Dips Toes in Alt Data
12.07.2018 | By Terry Flanagan
Challenges for the buy side were the focus of the Friday morning keynote at the WBR Equities Leaders Summit.
The broad question up for discussion was how will traditionally active managers need to adapt their investment strategies as automated technologies continue to play a larger role in the trading life cycle. The conversation focused on alternative, or unstructured data.
While the topic was narrow, the discussion proved to be a broad window into the institutional buy side’s approach to new methods and technologies. Large money managers are known for conservatism and not being first movers, and their gradual movement into alt data is representative of how this in their DNA.
BMO Global Asset Management is looking to improve how it taps into its own data, and also bring in more alternative data from the outside. But the $260 billion asset manager is not dozens of data scientists and throwing money at the initiative, as the return on investment is unclear.
“That’s not the way we operate,” said Ernesto Ramos, Managing Director and Head of Equities at BMO. “We tend to be incrementalists and gradualists.”
BMO has been doing quantitative investing since 1985, but uptake has been gradual. “We don’t say ‘let’s forget this way of doing things and bring in this new way of doing things’,” Ramos said.
Ramos defined alternative data as data that’s not on financial statements and not generated by exchange trading — for example, data on the trasnaportation of shipping containers.
“The challenge is, how do you process this? It’s almost impossible to go at this in any human interactive form,” Ramos said. Natural language processing and algorithms can be used, but there are still questions about how that would work.
Another challenge is that alt data is best in short-term trading situations, and BMO’s holding period is more like one to two years on average. “It’s tougher for us to take advantage of short-term signals,” Ramos said.
BMO is in the “exploratory” stage regarding alt data, Ramos said. The firm will likely tap third parties as it moves forward, as it doesn’t plan to add the expertise in-house.
For firms that are expanding their alt-data usage, it’s worth noting that the U.S. Securities and Exchange Commission is looking more closely at vendor management and oversight, which would extend to how data is procured. That’s according to Tyler Gellasch, Executive Director of the Healthy Markets Association.
“If certain information is valuable to you, it is valuable to others,” Gellasch said. “How do you get it? As you go through alternative data sources, you should be thinking about that.”
What Lies Beneath: ETF Liquidity
12.07.2018 | By Terry Flanagan
As with all asset classes, possibly the single biggest determinant of whether an exchange-traded fund trade idea should move forward is liquidity.
But ETFs have a unique nuance that adds challenges, and opportunities, to the trading process — that is, as a basket of securities, the liquidity is tied to the liquidity of the underlying securities, rather than the liquidity of the “wrapper” that appears as a bid-ask spread on the screen.
Speaking at a Friday morning ETF panel at the WBR Equities Leaders Summit, Adam Gould, Head of U.S. Equity Derivatives at Tradeweb, said there is a myth that if the spread or average daily volume isn’t good, that means it wouldn’t be good to trade the ETF.
On-screen numbers “shouldn’t be the gauge of the liquidity of an ETF,” Gould said. “Liquidity should be judged by how liquid are the underlying holdings in the index the ETF tracks, and what is the relationship with market makers.”
From their inception 25 years ago, exchange-traded funds have gradually scaled the ladder of acceptance within capital markets and now stand at about $5 trillion globally. There is more room to run, as Gould noted that “there are still lots of sophisticated money managers that are just now thinking about ETFs.”
In addition to market makers, pillars of the ETF market are are issuers, exchanges, authorized participants, and investors, said Joe Mahoney, Institutional Sales & Trading at Jane Street.
As the latter group is the most important one, institutional trading behavior is closely watched.
The Employees Retirement System of Texas has been “dabbling” in ETFs for a long time, said Michael Clements, Chief Trader. The pension plan started in equities, and then moved into fixed income when traders learned how to use the creation/redemption process to liquidate a bond portfolio and avoid costly market impact. “If we had to sell the individual bonds, word would get out and spreads would widen,” he said.
ERS uses ETFs mostly to equitize cash, and for asset-allocation purposes, Clements said. “As volatility in markets play out, we want to make calls quicker,” Clements said. If you’re underweight something, you can out money to work quickly” with ETFs.
Hennion & Walsh Asset Management uses all ETFs in some of its managed accounts, said Kevin Mahn, President and CIO. The firm likes ETFs for their low-cost, targeted, predictable exposure. In its trading, “we don’t care so much about the liquidity of the wrapper, we care about the liquidity of the underlying.”
Market Outlook: Maybe Not So Bad
12.07.2018 | By Terry Flanagan
Recent market declines paint a bleak picture of the economy. But are things that bad?
Not really, said Win Thin, Global Head of Emerging Markets Strategy at Brown Brothers Harriman. Speaking Friday morning at the WBR Equities Leaders Summit, Thin suggested it would be a mistake to buy into the thesis of gloom delivered by the recent turbulence.
“We have a lot to worry about,” Thin said. “But I think the market is overreacting to what has been going on. The U.S. economy remains solid.”
Thin presented a “view from 35,000 feet,” emphasizing that the global investment climate will remain challenging in 2019, largely due to heightened political uncertainty. But a trade war can be defused, and compromises can be reached.
As long as the geopolitical situation settles down at some point, “the U.S. economic outlook is the 800-pound gorilla in the room,” Thin said.
Thin noted a “significant” recent shift in market expectations for interest rates, from the Fed increasing this month and three times next year, to a likely-but-not-probable December increase and then none or perhaps one in 2019.
Part of the yield curve has inverted, but there remains almost 50 basis points between the three-month and 10-year yields, which has historically been the most accurate predictor of recession, Thin noted.
Regarding trade, “tensions will remain high,” Thin said. “The truce looks good on paper, but it’s questionable.” The economy can potentially live with tariffs of 10%, but an increase to 25% would be painful.
Europe is another headwind, as Thin noted that the eurozone economy is slowing.
Still, Thin remains bullish on the U.S. economy, and said equities will likely regain traction, and bond yields will rise a the Fed hikes rates two or more times next year. “The 10-year at 2.80-2.85% makes no sense to me given price and wage pressures.”