Being an academic researcher is a performance-oriented profession. For me, some of the most cutting edge thinking about this aspect can be found in performance management. Recently, I have been looking at Justin Newdigate‘s work on Noise as a way to continue to refine my personal processes: chronic and acute, latent and manifest disturbances, interruptions, and disruptions that can interrupt you. What are the sources of noise in your own life and how do you manage them?
I’ve spent a few weeks with the Bloomberg Professional platform at Bond University. I’ve also been reading Alex Preda’s sociological study Noise: Living and Trading in Electronic Finance (Chicago, IL: University of Chicago Press, 2017). Below are some trading diary notes on the differences between retail and professional traders:
Amateur / Retail Traders
- Able to submit bid or ask market orders or limit orders.
- News: company feed or Twitter sentiment data — herding.
- Trade Execution: tied to chosen broker who sells order flow.
- Order / Position Management: risk exposure, no post-trade analysis.
- Market Surveillance: focus on company / single asset classes.
- Trade Analytics: fundamental analysis, technical analysis which is ‘gamed’ by broker to encourage over-trading, and that is ‘gamed’ by HFT and Prop Trader algorithms.
- Able to submit orders with different sides, types and strategies — as well as quantity, ticker, limits, brokers, and instructions. Able to access market depth for BuyStrikeBid, BuyStrikeAsk, SellStrikeBid, and SellStrikeAsk orders (dealing with the order book and market microstructure).
- News: alerts, company, market-moving, and sentiment.
- Trade Execution: broker choice, liquidity, and transaction cost analysis. Execution focus on: Open Auction, Bid, Mid, Ask, Closing Auction, Blocks, and Dark.
- Order / Position Management: firm positions, risk exposures, post-trade, and trade reconstruction.
- Market Surveillance: economic events, global macro, asset classes, exchanges, company events, central bank activity, trading signals.
- Trade Analytics: company and peer analysis, price and volume, market depth, broker volume and liquidity.
Media personalities who took a career detour into managing hedge funds are the latest casualty of the subprime fallout, reports New York Times journalist Andrew Ross Sorkin.
Sorkin profiles Ron Insana the former CNBC news anchor who founded Insana Capital Partners at the height of easy credit in 2006 and closed ICP in August 2008. Insana raised $US116 million from major investor Deutsche Bank and media contacts. Rather than invest directly in complex financial instruments Insana chose an intermediary position: a fund of funds investor in a diversified portfolio of hedge funds.
Insana made several errors that led to ICP’s blow-up. Sorkin notes the US$116 million was a smaller capital raising than its blue chip competitors. The fund of funds positioning meant a rational herds strategy on the hedge funds that ICP invested in. Subprime-caused market volatility set off a cascade: the hedge funds didn’t make alpha returns above the market and ICP didn’t have the diversified portfolio to weather the volatility. Consequently, ICP still had to pay out investors in full for their original investments (the ‘high water mark’ rule) before it could earn its ‘1.5 of 20’ fee (1.5% management fee on funds and 20% of fund profits).
Sorkin is insightful about the cost structures of hedge funds:
That would have been enough if it was just Mr. Insana, a secretary and
a dog. But Mr. Insana was hoping to attract more than $1 billion from
investors. And most big institutions won’t even consider investing in a
fund that doesn’t have a proper infrastructure: a compliance officer,
an accountant, analysts and so on. Mr. Insana had seven employees, and
was paying for office space in the former CNBC studios in Fort Lee,
N.J., and Bloomberg terminals — at more than $1,500 a pop a month —
while traveling the globe in search of investors. Under the
circumstances, $870,000 just wasn’t going to last very long.
This ‘contrarian’ observation highlights the leverage of institutional investors, and, in contrast to the usual media portrayal, the regulatory burdens of institutional compliance on funds.
Sorkin’s profile raises some interesting questions beyond his comparison of Insana and the media-savvy millionaires who blew-up after the April 2000 dotcom crash. Did ICP adopt the trend following strategy from CNBC’s media coverage and Insana’s popular books? If so, could Insana distinguish between market noise and critical events? How did Insana grapple with the career change from CNBC news anchor to hedge fund head? What risk mitigation steps did ICP’s investors demand, and did Insana exercise prudential caution? When he had to close ICP was Insana able to be self-critical about his past decisions and errrors? Are there firm-specific, operational and positioning risks for fund of funds? That would be a really interesting post-implementation review for aspiring hedge fund mavens.