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02/23/2016

Permalink 11:19:00 am, by Dana Comolli Email , 595 words   English (US)
Categories: Accounting, Backoffice, Compliance

Best Practices for a CTA's back office - part 1

Every trader who has tried to raise money knows the drill from investors: yes we want to know about your performance, but also, explain in detail your back office (infrastructure, organization). Most allocators come with pages of checklists and expect the CTA to be able to answer their questions in full. In these next two blogs, we’re going to cover what allocators expect and explain what it really means to have a back office that passes investment standards.

Allocators like stability and thoughtful, business-like leadership that goes beyond what the yen will do tomorrow. Obviously, a core aspect of their job is performing due diligence on potential (and current) managers to make sure CTAs live up to these expectations. Many have a separate unit that only performs operational due diligence, and if they find anything amiss, even if the trader has outstanding performance, the investment will get nixed.  As Joe Vanderbosch of Dominion Capital Management notes: Allocators are looking for reasons to stop looking at you. So here we’ll discuss the first hurdles allocators want a CTA to overcome, and in our next blog, we’ll go over a checklist of essential back office needs and how to prepare.

1) Performance metrics: It’s not enough to have good performance, you need to be able to get into the granularity of it with daily and monthly performance data including information such as P&L attribution by market and sector, volatility, VAR and standard deviation. Vanderbosch notes that your end-of-month performance might be up 2%, but an allocator wants to see within those numbers and hear you explain them in an organized and disciplined fashion.

2) Reinvestment: Are you regularly investing in research and systems? You’ll have to show how you update not only your trading systems, but prove that you’re properly funding the research team and operational infrastructure.

3) Personnel: Obviously if a key manager leaves, the question is why? How was that person replaced? How long has personnel been with the firm? Who makes up the trading desk? Who runs the back office? What is the turnover rate? These answers need to be explained thoroughly, especially if there was a personality rift between principals and key managers/traders.

4) Expenses: Where is the money being spent, especially related to fees? Extravagance is a turn off.

5) Transparency: Holding back information when explaining your systems won’t win points. Allocators often feel CTAs think they’ve discovered the Holy Grail when it’s a simple trend following program. One London consultant noted a coy trader wouldn’t  be recommended to clients.

6) Execution: Allocators realize this is a main ingredient in the trade process and expect CTAs to understand its importance and be able to explain it fully during due diligence. They want to see that you have a detailed process that is transferable across your team.

7) Outside advice: The make up of your board should have at least one Independent director, an independent fund administrator and solid outside service providers. Unknown, poor quality service providers can show a lack of commitment to invest in the business.

Next time we’ll detail Back Office Best Practices, and show how CTAs can alleviate the day-to-day pain of managing a business and handling managed accounts in a practical and simple way.


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

01/18/2016

Permalink 10:36:00 am, by Dana Comolli Email , 683 words   English (US)
Categories: Reconciliation, Accounting, Futures Trading, Backoffice, Compliance

3 New Year's Resolutions for CTAs: Get your house in order

It is hard for commodity trading advisors to see themselves as a commodity, but  that’s what they become once their firm has been spotted by asset allocators. After all, a trader who has a 10% risk adjusted return is pretty much like another trader who has a 10% risk adjusted return.  Of course the key always will be performance, but time and time again, asset allocators say how traders run their business is just as important as who they are and how they trade.

So a goal for any trader is to get their house in order. That is, make sure your business is solid, your back office efficient and your reporting clean. To help out, we came up with three resolutions all CTAs should strive for this year. These ideas will help free up your mind to focus on trading, but acknowledge to allocators that you are ready to handle growing assets.

1) Reconcile trades, positions, and balances on every account, every day

Oh, the horror of reconciling all those managed accounts! But it needs to be done. Yes, you get statements from your broker(s) and trust those, especially as that is what the National Futures Association will look at in an audit, but it’s you who has a fiduciary responsibility to your customers, not the broker. That means it comes down to you to make sure the details of your statements are correct. The broker won’t get fined, but you will if those numbers aren’t right.

2) Publish your monthly performance by the third business day of the month

Get your performance information to the agencies, on your website, to your customers and to publications that need it regularly by the third day of the month. Of course allocators may have your daily balance, but spreading the word is the key here. Don’t delay, even if you’ve had substandard performance. And with a back office accounting system, it’s an easy push of the button. Further, use this opportunity to discuss your performance. Put out a short monthly explanation, such as your system caught the stock index plunge, crude futures took an unexpected jump, etc. Here’s how you can explain your trading as well as be professional in distributing your performance on a regular basis.

3) Produce end of day trade files in the format and symbology each counter party wants without staying late to prepare them

Yes, one of the headaches of trading is dealing with the non-trading aspects. For example, brokers, administrators and allocators will want the reporting information in their own formats. Different symbology can be a nightmare: Some groups use C for corn futures contracts while others use ZC and a third want Bloomberg tickers. One broker uses a pricing format in dollars, another uses pennies, and the exchange uses pennies with fractions in eights. For many markets, there isn’t a standard format, and this can be a nightmare for any trader without the proper back office system. But having a system makes it easy. For example, the DMAXX software allows a trader to click a couple buttons to define the symbology of each broker and administrator and once input, it seamlessly formats the reports every month and sends them in the proper format requested by the firm, whether FTP’d or e-mailed securely. The accounting happens automatically as a result of trading.

These are resolutions that can help take your business to that next level. By setting up your back office to output reports in a timely and definable manner, you can show allocators you are ready to grow your AUM. To many allocators, CTAs are a small part of their overall portfolio, however, making your back office work efficiently and effortlessly (for you), an allocator can become a big part of your portfolio.

Dana 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

02/12/2015

Permalink 11:15:00 am, by Dana Comolli Email , 476 words   English (US)
Categories: Reconciliation, Accounting, Futures Trading, Backoffice, Reporting, Compliance

Signs you need a new way to run your CTA

Like many small businesses, CTAs frequently hold onto processes much longer than they should.  This is particularly true of those related to the operation of the firm.  Inertia, a perceived lack of time to look into better approaches, and short term cost avoidance are a few of the reasons this happens.

While sustainable in the short run, not maintaining and enhancing an organization’s operational infrastructure can be highly detrimental over time as it limits the firm’s ability to adapt to changing market forces and can leave it at a disadvantage compared to other firms.

Compounding this situation is the fee compression that seems to be affecting all advisors.  Given the reduction or elimination of management fees, operations must be as efficient as possible in order to maintain profitability.  Processes that are tedious, error-prone, and not scalable must be reviewed and replaced with ones that are streamlined, automated, and not dependent on any one individual if the firm is to be positioned for long term stability and growth.

While certainly not exhaustive, if any of the following describes your current operation, it’s probably time for you to look into ways to upgrade your processes:

  • Going through broker statements by hand to perform trade reconciliation.
  • Monthly numbers posted during the second or third week of the following month.
  • End of day trade files to send to brokers and administrators are prepared by hand.
  • When a key back office person is sick or takes a vacation, the firm goes into a panic.
  • Values from statements are keyed into Excel to produce performance numbers.
  • Monthly rebalancing is one of the most dreaded activities in the firm.
  • Operational due diligence always has its issues.
  • The mention of another clearing broker puts fear into the eyes of the operations staff.
  • Even though all trading is done electronically, post trade processing involves a series of disconnected operations that are a combination of manual and (hopefully) automated processes.
  • Error rates and long hours are directly correlated with trading volume.
  • Preparing invoices and getting paid from FCMs is a dreaded, manual task that takes hours.
  • Resolving trade breaks is a time-consuming, manual process with lots of cut and paste operations.

Rather than addressing operational issues piecemeal, it is frequently a better strategy to review the entire process and incorporate a toolset that encompasses all aspects of the operation.  Doing so allows you to take advantage of approaches that have been time-tested by a wide range of advisors and at the same time can be faster and less risky to implement than a number of custom, point solutions.

Beyond solving specific, tactical issues involved in running a CTA, the implementation of an integrated operating system also provides the following strategic outcomes for the firm:

  • Simplified, Scalable Operations
  • Minimized Operational Risk
  • Highly Responsive to Investor Data Requests
  • Streamlined Due-Diligence
  • Reduced or Eliminated Trading and Reporting Errors
  • Timely Reporting of Performance
  • Reduced Overhead

This results in making the firm a better place for capital sources to entrust their investment dollars.

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