Acsye

Week 8 2012

The Managed Account Review is growing, and I’m happy to join them as we tread the tricky waters of managed accounts. As I take a look at the pages of this good site, I ask myself what our visitors would like to see and read.  I believe the answer was simple.  You need a view, an affirmation, and support on the matter of your investments and the capital markets, and you need this information from an expert analyst.

This week, please sit back whilst I assist with your investment management.

Your choice of managed accounts and investment strategy should be based the following criteria: -

• Strategy Details
• Trading Experience
• Macro View
• Technology Use

Over the coming weeks I will publish articles on one or more of these 4 core criteria. For now, let us simply review exactly what we want.

Strategy Details

Your account manager should be able and willing to articulate the most detailed aspect of the algorithm or strategy in a simple way so that you understand it. All trading strategies fall into two broad technique categories 1) Momentum and 2) Mean Reversion and a further sub categries of pace a) High or b) Low frequency. In the diagram below a number of fund types are shown falling within the square. Ask your account manager where on the square does his strategy fall? She must know.

Trading Experience

Trading experience should be measured only by the real cash value traded recently in the markets (Not! Back-tests, paper trades or chart pictures) by asking your manager i) the average trade size and ii) the number of these trades in the last 2 years

Technology Usage

Although I am biased, even the most fundamental Luddite is being swayed towards the absolute significance of technology. All trading in the capital markets touches technology at some point in it flow. The idea that any trade is manual is nonsense; a limit order is a simple algorithmic trade.  So trading is either automated with a computer algorithm 99% or maybe only 20% in the case of a limit order. The advantage of computers for all orders is clear, the advantage of a particular computerised strategy is less clear and should be analysed in detail before making any recommendation. To learn more about computerised trading I suggest watching Kubrick’s 2001 Space Odyssey[1] and/or Jonathan Mostow’s Terminator 3; the Rise of the Machines [in Trading FX, Equities and other asset classes]

But how do you simply judge your account managers technology? Most algo and trading problems are caused by simple, basic problems that most computers users witness everyday.  Just remember your own computer and all the problems you have with it – then ask your manager how she has planned to alleviate these similar problems within the context of a risk framework that she described in her macro view [next section].  The problems she needs to alleviate include power failure, network outage, hardware failure, disk freeze, exhausting memory, network failure You and your manager should have answers to all these simple questions

Macro View

Have you and/or your account manager a view on Risk and how she plans to manage Risk using the strategy? In particular a view on whether Risk is contracting or expanding currently in the market. If neither of you can articulate an answer to this with examples and also provide an explanation you probably should speak to somebody who can

At Merrill Lynch in London until 2011, I managed the analytical services for the largest equities business in the EMEA[2] region. So I probably know nothing about analysing trading. But why would I know nothing having worked for an organisation with a pedigree such as that of Merrill Lynch?

Because large banks equity trading has been tainted by Sell Side rhetoric on transaction cost analysis[3] and reversion[4]. This analysis that is commonly used in Banks is concerned mainly with the mechanics and quantitative cost of supplying execution services, rather than the quality of the execution in the macro sense or even the quality within the microstructure detail[5] In the Banks and large technology outfits there is little thought or analysis from clients perspective.  The world should lose sight of why cash-cow retail banks even need risky ‘global banking and market’[6]  divisions. At the risk of making a religious or political mea culpa it is time for the ‘Anti-Bank’

Next week I will be present my own theory of algorithm analytics under the Strategy Details

Until next Week 9

Acsye™