TheBooks

Trade capture refers to the four distinct activities that must be performed to ensure completed trades end up assigned to the correct accounts in the correct quantities and prices.  These activities are:

1. Obtain the fills
2. Assign the number of lots to each account
3. Assign fill prices to each account
4. Communicate the allocations to executing and clearing brokers

Performing this process correctly, every day in a timely manner, is key to the successful operation of any CTA.  Here is how TheBooks can be used to facilitate this process.

Obtain the fills

The two most popular ways CTAs use to obtain fills are:

1. Receive a CSV file of fills from the executing platform or broker and loading them into TheBooks
2. Via one or more FIX connections to either exchanges, brokers, or trading platforms causing fills to be processed as they happen

To facilitate working with CSV files, TheBooks provides a way to define the layout and processing rules for CSV files.  Once the definition process has been completed, the files are automatically processed any time a file is placed in a designated folder.  If desired, TheBooks can be configured to reach out to FTP sites or accept emailed trade files and automatically process them as well.

For environments that require one or more FIX connections, TheBooks supports exchange-direct, broker-direct, and execution platform FIX interfaces.  These typically use an encrypted connection over the internet and provide a real-time trade flow directly into TheBooks.

Assign lots to each account

When a trade is received, the contracts that make up a trade are typically assigned to either a holding account or to a group of accounts.  Trades are usually assigned to a holding account when all the trades in a given contract are to be aggregated at the end of the session.  Trades are usually directly assigned to a group of accounts when the assignment of contract quantities and the allocation of fills is to be done as the trade is completed.

Regardless of the approach, accounts generally receive contract quantity assignments based on the account’s trading size relative to the other accounts that make up the trade.

Account controls

The assignment of which specific accounts from an account group are included in a trade and how many contracts a given account receives is controlled by properties associated with the account.  The properties that control this are:

• Trading Size - This is a formula (or constant) that specifies the trading level of the account in the account’s reporting currency.
• Include/Exclude market/sector list - This is the list of markets/sectors the account can or cannot trade.
• Trading System multiplier - This is a factor that is used to scale the trading size based on the trading system(s) involved in the trade.

When TheBooks receives a trade associated with a group of accounts, it uses these properties to filter out any accounts that are not allowed to trade the market, adjusts the trading sizes as required, and converts them to a common currency if required.  It then assigns each account it’s share of the overall trade based on the account’s trading size relative to the rest of the accounts.

When trades assigned to holding accounts are bundled together and assigned to an account group, the same process is followed when creating the combined trade.

Assign fill prices

Quantity/fill price pairs are automatically allocated to each account in the trade based on rules configured for the system.  The most common approach is to use the low price to low account number method, however, TheBooks supports other approaches, including exchange APS and a synthetic average price method that gives each account in a trade a mixed fill that is as close to the overall trades average price as possible.  This method is especially useful when trading markets that do not support APS and account sizes are widely varied.

Communicate Allocations

After the trade is complete, allocations are typically sent to the executing firm and frequently to each of the clearing firms as well.  More often then not, these are sent as CSV files (usually different formats for each counter-party) either via a secure FTP (sFTP) connection or via email.

TheBooks allows the definition of what file formats go to each counter-party.  As part of the definition, the transmission method (FTP, sFTP, eMail, etc) and what symbology should be used is also configured.  As a result, trading-related information is automatically sent to all counter-parties related to a trade as soon as the trade is complete in the format and via the method required by the counter-party.

Summary

By using TheBooks, you can fully automate the trade capture process to ensure that accounts receive the correct contract quantities and fair fill prices and that counter-parties receive timely and accurate notification trading activity allowing your staff to focus on other aspects of running the CTA.

Big and emerging CTAs alike have one need in common: growing assets under management. Although the large CTAs who get the lion’s share of investment funds have a different path, the truth remains: assets come and go and the hunt for new money is universal.

So what do the experts advise in this hunt for investment? What should all CTAs be doing, and how does that change as AUM grows? Here are some pointers from managers, third party marketers and asset allocators on how to grow your AUM.

What Investors Want

In a 2014 study by Cogent, (and updated by Johnson & Co in 2016), it was found that large investors, from where a significant amount of money is entering the managed futures industry, are consistent in their needs. Both pension and non-profit funds see integrity and transparency as a first hurdle. Of course, investment performance also is key, along with organization stability. Interestingly, fees and fee structure ranked seventh, with risk management practices not far behind.

Bryan Johnson, of Johnson & Co. notes, “The fundraising climate is filled with stringent expectations by investors along with increased operational requirements.” This means an especially high bar for smaller managers, those with less than $100 million AUM, as they have the most “mistake-filled” marketing efforts and typically “have no real marketing process,” which leads to “guesswork, poor choices, inconsistent behavior and fatal mistakes.”

Even in the billion-dollar world of large CTAs, raising funds can be difficult, especially as firms need to set themselves apart from other behemoths. And though big investors say fees aren’t as key, they are. One reason all the new smart beta strategies have evolved – mainly through large trend following CTAs – is to give pensions, who are used to paying investment manager by basis points, an option to utilize the strategy without the risk, or über performance.

For smaller or emerging managers, there is a need to make a name, and often this comes through adopting new or unique strategies.

Andre Boreas, CEO of Quadsight Partners, says, “Investors these days are looking for a unique strategy that compliments their existing portfolio.” Understanding this going into an investment meeting “can make the difference whether your material actually gets read or gets the 15 second fly-by.” These investors want to know how you can “add value to their total portfolio.”

For example: if your strategy focuses on distressed credit, and you’ve learned asset allocators believe “the time’s not ready” for that market, educate them. Engage them on what is happening in that market, including anything from “energy assets to European bank debt.” This insight will help as they make their future selection and set you apart. Likewise, if your CTA focuses heavily on commodities, educate allocators on the need for diversification and exposure to this asset class especially with the uncertainty that a move to less globalism that the incoming administration campaigned on will have on equity prices.

Universal Truths

For any size CTA, there are core rules every asset manager recommends:

• Maintain ongoing dialogues with your current clients for additional funding, and leverage your clients to be introduced to potential new prospects.
• Provide updated performance information on regular basis as well as explanations of your approach.
• Maintain ties to organizations and school alumni groups for networking.
• Attend conferences set up to be mixers for CTAs and asset allocators, focused on your CTA size. For example, CTA Expo/Emerging Manager Forum purposely was designed for emerging CTAs who need to meet those wanting to invest in new and growing talent. Even if brand new to the business, it’s good to start meeting allocators, but attend any conference with a plan: set up appointments prior to attending, have key marketing materials, know who you are meeting and remember it’s not always about you. Focus on their needs as well.
• Hypothetical track records will take you as far as family and friends. If you haven’t actually put real money in the game, your message will be lost. In a similar vein, if you have less than a 2-year track record, you’ll need to outline how your trading would perform in various economic cycles.
• Hire a third party marketer, if possible, that will allow you to focus on your business and trading; that said, be available to meet potential asset allocators; you can’t simply outsource your sales and marketing and expect to be successful.
• Be able to explain your trading clearly and simply. Focus on your main strategy, for example: short-term trading with focus in financials, and move on from there. Be able to explain any changes to the program, drawdowns, new products, etc.  Convey how your alpha generation is repeatable, as well as have available key quantitative measurements, such as risk, daily exposure, alpha vs. benchmarks, and volatility.
• Be able to explain your operation, and why they should feel confident in your business organization, especially back office operations.
• Be prepared for a long gestation period for their interest to take hold, always follow up without being a pest, and be ready for disappointment. Most people you’ll meet with won’t be investing, but each meeting will be educational.
• For larger firms that have long track records, it’s important to understand what big money, such as pensions, endowments and corporate funds have done with investments in the past. Also, today consultants are the key pathway to these big firms, which hire them to do the leg work. That said, it’s typically the pension board that makes the final call, usually but not always following the consultant’s advice. The lesson here is to get to know the consultants and make sure they are informed about you, and any new products, as is the final client.   Consultants can make or break an investment.
• Look at all options for raising capital. Today there are several trader “platforms” such as Kettera, Oasis and Genesis that actively search for CTAs to include on a platform in which clients can review and pick and choose CTAs for a portfolio. Sometimes a CTA will have to put up initial capital for these platforms, and it may be well worth it as an extra tool to raise funds. Larger platforms, such as those of Deutsche Asset & Wealth Management and Lyxor, typically appeal to big money, so for smaller managers, check out the independent platforms. Also, check their distribution methods and which ones provide the best clientele.
• Access business through your broker: leverage that relationship whenever possible. Many brokers won’t do marketing for CTAs, but some select ones will push what they consider strong players to their clientele, which can be a far-reaching network. The best advice is to keep working with your brokers to determine how they can help you increase your AUM.

One final note: The DOL’s new fiduciary rule going into effect April 2017 impacts qualified assets, retirement and tax exempt funds on the brokerage side, basically saying these funds can no longer pay commissions to brokers, but need to pay in basis points as registered investment advisors are currently paid. Call this the institutionalization of the business where large futures funds and CTAs have entered the mutual fund arena with either smart beta or other types of funds. Fees of old will be bypassed; for example, BoA Merrill Lynch has already told its brokerage team to quit selling mutual funds to retirement accounts due to this change [Note: a Trump administration has said it might disband this ruling]. This does not affect non-retirement funds, but as one fund manager said, CTAs should realize that fund raising on a large scale will need to be focused on finding the best distribution networks, such as those made up of RIAs. Bone up on the regulations to see how it will affect your business.

________________________

Dana M. Comolli is president of DMAXX (dmaxx.com), a back office software design firm for alternative investment managers. TheBooks software is designed for the trader, and is built to do price, position and order management, reconciliation, trade accounting, performance reporting, risk and data management and act as a gateway to a wide variety of execution platforms. You can reach Dana at: dana@dmaxx.com

In the previous article, I discussed  how technology can help CTAs with back office tasks and potential headaches. Here I am looking outside the trade, to setting up and collecting and distributing performance information, especially to clients.

Tear Sheet Creation

One of the more time-consuming tasks for an advisor is the production of the marketing summary that is emailed each month outlining the performance of their programs. The production of performance statistics, comparison benchmarks, and other information contained in the document often requires hours of preparation.

Software designed to address this problem allows the author to set up the document layout and style to fit the organization’s requirements, select from multiple charts and tables and save the definition for use each month. When it is time to prepare an updated version of the tear sheet with the information from the most recent reporting period, it is simply a matter of clicking a button and entering the commentary; hours become minutes.

Performance Attribution

As investors and regulators get more sophisticated, the requests for the attribution of an advisor’s returns get more complex. Attribution by direction (long/short), by sector, by market, by strategy, net of commissions, without commissions, by NAV, by trading level, by timeframe, all are becoming standard types of requests. Add to this that these reports are required every day and must be sent to a variety of investors, and not having a flexible reporting database fed directly by your trading and accounting can overwhelm a firm’s resources.

Email Encryption

With the latest Interpretive Notice from the NFA on Rules 2-9, 2-36, and 2-49, the requirement of encrypting all data in motion is nearing reality. This means that any emailed or FTPed report your firm generates and sends will have to be encrypted.  It also means that any client information your firm receives (statements for example) will be encrypted as well.

Manually decrypting files when they are received or encrypting them before they are sent will place an extreme burden on your operations staff because each source and destination will have different encryption keys, passwords, and methods.

Solutions like subscribing to a service that encrypts all emails is one approach. A more flexible, easy and cost effective approach is a system that is integrated with your trading and reporting systems and automatically encrypts files and reports that are to be sent as part of the sending process and decrypts statements or other inbound client information as it is received.

Performance Fee Calculations

Handling managed accounts often means different fee calculations for each account. Daily liquidity means additions and withdrawals can occur at any time. Combine the two and you now have a complex performance reporting and fee calculation environment. Yes, it could be done in Excel, but no, that is not traceable and it is prone to errors from simple copy/paste mistakes.

A better solution is a system that is directly linked to your trading and calculates performance using the daily compounded returns method, allows formula-based fee basis formulas for management and incentive fee calculations at the account level, and automatically adjusts the high water mark when additions or withdrawals occur. The results are daily NAVs without the need for manual intervention or the risk of error that a spreadsheet brings.

Client Reporting

What do you do when each of your clients want different types of reports each day? If you don’t have a flexible system designed specifically for customized client reporting, someone in the firm spends time after the close preparing the reports and manually sending them to clients.  If, for some reason, that person has the day off, the process may not run as smoothly under the best circumstances. If something in the “process” goes wrong, life gets very interesting.

If, instead, you had a system that allowed you to define what types of reports each client is to receive, in what format, via what sending method, the reports would get produced automatically as part of the end of day process; no manual intervention required.

In these two articles, I have outlined the key areas where effective automation is key to the smooth and cost-effective operation of a CTA. Systems that have been designed to be flexible and integrate all the aspects of a CTA’s operation provide a higher level of client services at a lower operational risk and are able to grow with the organization.

________________________

Dana M. Comolli is president of DMAXX (dmaxx.com), a back office software design firm for alternative investment managers. TheBooks software is designed for the trader, and is built to do price, position and order management, reconciliation, trade accounting, performance reporting, risk and data management and act as a gateway to a wide variety of execution platforms. You can reach Dana at: dana@dmaxx.com