It has long been the case in the world of investing and trading that being an accomplished trader with a verifiable edge is only one component of a successful trading business. More nascent money managers have been tripped up by a lack of proper business infrastructure — be it accounting, back office, risk management strategies or compliance teams — than a faulty trading strategy. In the post-credit crisis, Dodd-Frank and MF Global world that is truer than ever. Add to that the fact that there are no longer trading floors — the great Darwinian proving ground for emerging traders — and it is appropriate to ask, “Where will the new trading all-stars come from?”
If your response to that question is, “Our great universities, emerging managers, math and science whiz kids, proprietary trading desks of banks, or even retail traders who develop a unique edge,” you are right because the best answer may be all of the above.
This is not simply an academic exercise, as existing fund managers, brokerages, prop trading firms, family offices and entrepreneurs are actively searching for top trading talent. They are doing this in unique ways, in different places, and utilizing the power of social media to develop broad networks of analysts and traders.
A year ago we highlighted LaunchPad Trading LLC, which is a joint venture of HC Technologies LLC and Tudor Investment Corp., to actively seek the next generation of trading talent.
The plan was to recruit discretionary futures and forex traders, provide them capital and groom them to eventually manage customer assets of Tudor.
LaunchPad is headed by two former Tudor employees: Joe Niciforo, managing member of HC Technologies and CEO Nancy Skiest Andrews, who previously was an investment manager at Tudor.
A year later LaunchPad has made six allocations of $10 million per trader, but has broadened its search to include more quantitative based managers as well as broadening the scope of the program.
“We have widened it for a couple of reasons. One is we are finding more opportunities in some other areas and we want to get a little more diversified,” Andrews says. “We initially started out more as purely discretionary, now we [have] more hybrid strategies. We have expanded the scope of some of the instruments we initially allowed on the platform.”
The original mandate was for global macro traders, but Niciforo and Andrews saw the world has changed. “As we see the world get more quantitative in nature than macro traders, there is a large universe of those using systematic components and quantitate measures to enhance their trading,” Niciforo says. “A lot of discretionary traders have systematic ways of looking at the markets, the line between systematic and macro is somewhat blurred. We are seeing a lot of candidates that fit that profile who are bringing systematic components into their models that enable them to make discretionary decisions.”
One space where the tendency toward quants has already been in place is in the market-making and proprietary trading world.
Chicago Trading Company (CTC) has been making markets in options for more than 21 years, and trades partnership capital. “Our secret to success is our pricing and risk management and our teamwork,” CEO Eric Chern says. “Everything we do is trading the firm’s portfolio, providing liquidity to the end users of the market who are seeking risk transfer on the exchanges.”
CTC has hired traders as undergrads and trained them in their trading strategies and methods. “Most of our recruiting comes from undergrads; we are looking for the best people we can find in the science, technology, engineering and math programs,” Chern says. “We look for very solid judgement, ability to solve complex problems in creative holistic ways; certainly math and engineering skills are critical, and good communication is essential because we work in such a team environment. But people also need to be a good fit and believe in our core values: Teamwork, integrity, humility, continued improvement and sustainability.”
Chern has been with CTC for 21 years and built some of its models, but acknowledges that with the demand for greater quantitative skills, he might not get hired today. “I helped us write our risk models when we started, but I could never get a job as a financial engineer here now,” Chern says. “For us, because the markets are so complex and there has been so much advancement in technology and financial engineering — that is why, while we used to hire almost all undergrads, today we also have an emphasis on hiring PhDs; our head of financial engineering is a PhD in astrophysics.”
The growth in complexity and shift to quantitative strategies is pushing hedge funds to recruit science and math focused PhDs. “I am astonished at how many of my clients are now recruiting PhD students from a trading perspective,” says Sasha Jensen, Founder of Context Jensen Partners. “That is the new trend; 10 years ago it was all equity long-short, fixed income talking about alpha and beta; there wasn’t this other level that we have now seen: machine learning and machine operations and machines executions.”
While LaunchPad was looking to vet managers to make an allocation that could eventually be a satellite program for Tudor and CTC was looking for the best quants, FundSeeder Technologies takes a different approach. They are looking to build a farm system of traders on one side, while sister firm FundSeeder Investments lines up allocators, hungry for trading talent, on the other side.
They built out a technology platform to source as many traders as possible in a scalable way. “We made a calculated bet to build this technology strictly on source entry and add a top notch analytic platform because if the traders come, then the investors are going to come,” says FundSeeder co-founder and CEO Emanuel Balarie.
FundSeeder Technologies has recently built its platform and registered FundSeeder Investments with the Commodity Futures Trading Commission to begin introducing investors to certain regulated traders. The allocators who are signing on with FundSeeder Investments are all institutional. “These are first adopters, people who are going to be allocating to emerging guys. They prefer guys with $500K to $1 million [AUM],” Balarie says.
“These investors who contact us through FundSeeder Investments are doing so because they believe in emerging managers, and they believe that the edge in finding emerging managers is finding them first,” Balarie says. “They may want to allocate to capacity constrained markets or negotiate fees; they come to us and we are handling the introduction. They know exactly what they are looking for to a granular detail. We say give us a mandate, tell us what you are looking for, how much you are looking to deploy, how much per manager because we have managers on our shelf that might be exactly what they are looking for.”
There are more than 5,000 traders on the FundSeeder Technologies platform with approximately 2,000 signed up for direct tracking through their broker. FundSeeder Technologies utilizes proprietary analytics to rank the traders anonymously based on directly tracked broker data.
“It is not a copy trading, retail focused, brokerage commission generating company. FundSeeder is broker agnostic,” Balarie says. “The active hedge funds in the marketplace have
$3 trillion in the market with approximately 85% controlled by 668 firms. Why is that the case? That is the problem we are trying to solve. There are millions of talented traders out there, why have they not been able to break through and actually manage money?”
He adds, “There are tremendous barriers to entry” and FundSeeder is looking to sign traders up and help them grow through all the stages of trading (see “Growing a manager,” page 18). “We are working to create new investment products where we have an opportunity to source and distribute managers. Hopefully these managers will become substantial players, perhaps managing several hundred million or more, and eventually be competing against the status quo. It is a methodical process,” Balarie says.
Another unique platform, operating overseas, is eToro, which is a “copy trading” platform where traders can see other traders returns and choose to follow them and replicate their trades (see “This could be a game changer,” page 21).
FundSeeder’s process involves several stages and the principals of FundSeeder, co-founder James Bibbings — who is also president of Turnkey Trading Partners, a firm that can help talented traders become registered when they are ready for that step — and Jack Schwager, an expert at finding and profiling trader talent, are there to help them. Schwager was deeply involved in building FundSeeder Technologies’ analytics, focusing on the elements that he has found most important in analyzing manager performance.
Schwager says in the idea that a lot of great traders are undiscovered. It is a matter of taking a huge group of trades, finding the ones that perform best and then drilling down further. Who better to drill down further than Jack Schwager, who has been profiling the best in the business for decades? The goal is for another book, tentatively titled “Undiscovered Market Wizards.”
What is common between the platforms is that traders today struggle with the non-trading side of the business; the asset raising, back office and compliance side. “We noticed that traders are signing up not only to potentially get capital, but because they like the analytics and performance tracking,” Balarie says. “What we are giving them — they don’t currently see from their currentbrokerage firm and it is for free, so there is tremendous value-add.”
Even LaunchPad, which is making significant allocations, is finding a market for their infrastructure as well all the promise of assets. “There is a large number of managers who have tried to go it on their own and have standalone funds, and they’re finding that it is very challenging to raise assets in this environment even if their performance is good,” Andrews says. “A lot of managers have wanted to come onto our platform, use our infrastructure and use our name to attract assets.”
Niciforo adds, “Many traders desire to be on their own and be seeded and there is a point when they are out on their own, and some managers see how difficult that is — that they can’t focus on what they love to do, which is trading.“
Instead, especially in the current regulatory environment, traders must focus on raising capital and having all of their infrastructure in place. “There is something very nice about coming to a platform and having everything taken care of, the only thing you need to focus on is your trading, building up your track record,” Niciforo says. “Right now we are providing everything. We are providing execution, we are providing risk management, we are providing the capital, we are providing compliance, we are providing accounts, we are providing legal — and in many cases our partners at Tudor have been very generous sharing their expertise.”
This is at the heart of the FundSeeder’s baseball farm system analogy. “How do [allocators] know if a current fund manager is subpar relative to someone in “Triple A”? They don’t know because there is no farm system in place. We can’t be naïve to think that just because a trader is good at trading and has great numbers that they should be allowed to manage investor capital,” Balarie says. “Our goal is for traders to keep on trading where they are at. If they want to get regulated so that we can introduce them to investors they can do that, but even if they just want to establish a track record or to see how good they are relative to their peers, or to just use the analytics, that’s fine too. We want to help with that process.”
How does FundSeeder Investments step up and make a connection? “Just because you find someone that checks all an invesor’s trading mandate boxes doesn’t necessarily mean they are properly registered or ready to take on capital,” Bibbings says. “If we find a trader who is not set up for an allocation, that’s where FundSeeder’s resource connections come into to play. We’ll say, ‘Hey, you need to be CTA, RIA, or SEC or CFTC registered. Let us help you.’ We want to hold traders’ hands to make sure they do things the right way so allocators can get access to their trading skills.”
It’s a quant world
While allocation platforms are discovering the depth the trading world has shifted to — quantitative methods — the institutional trading world has been in that space for some time.
Jensen says that Big Data is being used in recruiting traders and money raisers in the hedge funds and prop trading world.
“A number of my clients have initiated research projects that focus on traders. They like to track talent. We track and analyze the candidates. If they are placed in 2014 and then in 2016 [they move to a new firm] we triangulate the performance of the fund, the depreciation of the fund and the performance after,” Jensen says. “They are tracking individuals that come out of the top 15 universities that they deem appropriate to be a part of their firm’s culture and then they say, ‘Let’s track this individual for when they go from one job to another to another’ as they would track an investment analyst.” Jensen, a recruiter, points out that it’s not just one outlier but, seven or eight of very large institutional funds doing this.
A great analogy for what is going on is the way a professional sports team would track athletes from college into the pros and keep track of their progress so when they may become free agents, a team would have a short list of players they may like to sign. It is a very recent phenomenon, Jensen says. “A number of my clients have initiated this project in the last 12 months. It is a very fascinating process. Either they go straight to the buy side, or the sell side and move to the buy side. [Recruiters have] developed a tracking mechanism that looks at LinkedIn, looks at the accolades of these individuals; it is very fascinating how significantly they [use a] data approach to recruitment, which is what we do,” she adds.
Like the various retail focused platforms, large hedge funds can follow trading talent as it develops and can decide when to engage a trader in a deeper partnership.
This way funds can find the right person they are looking for at the right time. Not someone with potential, but someone who gained the experience necessary for the role the fund is trying to fill somewhere else and are now ready to hit the ground running.
A common theme from everyone we spoke to is that they are collecting data on traders and will be flexible as to how their models will develop. “We have learned that initially, we had to get more creative in terms of where we find talent,” Andrews says. “As we get further away from people at banks [and traditional trading venues] … we’ve had to do an outreach into universities, we’ve had to consider talking to fund managers that are already out and set up on their own.”
In other words, all of the above.
There is a constant demand for trading talent and the growth of quantitative trading, closing of trading floors and even regulatory changes have altered where those traders come from. What hasn’t changed is the broader trading world seeking innovative ways to find where that talent will come from in the future.
This could be a game changer
London-based broker eToro takes a unique approach to trading platforms that is a true game changer where it is being employed. eToro allows its more than five million users to copy the most successful traders on the platform and automatically replicate their trades.
The platform—up and running for five years— has created some institutional managers from their midst. “We’ve seen people who started on our platform and ended up getting jobs at some of the big trading companies as a result of their public performance,” says eToro’s UK Managing Director Business Joe Hall. “Some have come in with relatively small accounts and now control hndreds of thousands of other people’s money.
This has serious implications regarding the disintermediation of professional money managers. Here is how it works. “There may be a trader with 50,000 people following his investments. Every time he trades anything it automatically replicates those trades in 50,000 accounts,” Hall says. “You would sign up today, deposit $1,000, find [a trader] on the eToro network, look at [that trader’s] three-year profit/loss and other metrics and then you would make your assessments — whether you want to invest in [the trader] directly or not — and then you click on [that trader], click on copy, enter “$1,000” as an amount, and that is it.”
The person being copied will receive payments from eToro, which for the most successful are up to 2% of the value of other people’s assets under management. “It is like an affiliate deal,” says Hall.
The broker is licensed by the Cyprus financial regulator as a portfolio manager, and also has a brokerage license in London from the FCA. “As part of our portfolio management license we are allowed to enable people to copy other people, says Hall.
eToro generates profits from the spread. “Our margins are baked into the spreads, we also charge a low overnight fee and a weekend fee, [but] there is no membership fee or management fee,” Hall says. “We built a platform for people who want to make their money work harder for them by investing directly in another trader. They can see everything transparently in real time. If you want to go to a big bank and get this service, they are going to send you a statement once or twice a year and you are not going to have any control over what you are doing.”
Others are copying eToro’s copy trading platform, which is growing rapidly in Europe and has opened up in Russia and China, with no plans for a U.S. affiliate.
The concept is simple but could have serious implications for the investment advisor world.