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Making an impact
A comparison of hedge fund and long-only priorities
on algorithms reveals some intriguing trends.
T
he results of our survey of
algorithmic trading among
long-only funds (The Trade
51 pg 66) found the industry was
seeing a flight to quality. As market
conditions become more chal-
lenging and banks see a squeeze
in revenues, both the sell-side
and the buy-side were looking to
rationalise their relationships and
stick with their best clients and
providers respectively.
It also found there was a growing
need for more complex services
to help long-only managers truly
understand the execution process
and get the most from every algo
they deploy in the market.
This issue we take a look at how
the priorities of hedge funds differ
from their long-only peers as
these two important pillars of the
asset management industry seek
out different approaches to major
transformations in regulation,
market structure and the economic
environment.
Looking at scores given to key
product features by the two types
of asset manager (Fig.1) we see
some key points of divergence.
Among long-only managers
market impact scores soared to an
average of 5.89 and this has been
48
TheTrade
Autumn 2017
even more pronounced among the
hedge funds, who gave market im-
pact an average score of 6.06. This
is likely due to the extra attention
hedge funds will require over an
issue so important to the kind of
arbitrage strategies they commonly
deploy, something their providers
will no doubt put extra effort in to
providing.
Another key point of difference is
in execution consulting. While this
is now the highest scoring area for
long-only funds at 5.91, scores from
hedge fund clients were far lower
at an average of just 5.24.
for long-only strategies, or it may
simply be that hedge funds feel
comfortable with their execution
capabilities and thus see less value
in such a service.
However it certainly does not
seem to have led to a feeling among
hedge funds that they aren’t getting
good service levels, with a very
high average score for customer
support of 6.0, much higher than
the fairly dismal 5.13 given by
long-only managers. Algo provid-
ers can rest assured their hedge
fund clients appear to be very
content with the customer support
“There was a growing need for more complex
services to help long-only managers truly
understand the execution process.”
This seems at odds with what
The TRADE has been hearing from
the sell-side about execution con-
sulting services, which many now
view as a key priority ahead of the
introduction of MiFID II’s stricter
rules on best execution. Howev-
er, it may simply be that the kind
of execution consulting services
developed so far are more appro-
priate to the much larger market
they receive.
For the most part, hedge funds
seem to have similar reasons for
using algorithms as the long-only
funds as shown in Fig.2. Issues
such as reduced market impact,
consistency of execution, ease-of-
use and increasing trader produc-
tivity are at the top of the list for
both. While the exact numbers
vary there are few significant