8/2/2019 Capturing Ideas for the Good of All

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FINANCIAL TIMES MONDAY APRIL 28 2008

FTfm

Capturing ideas for the good of all

Writers hate to be asked Where do you getyour ideas from? because they rarely know

the answer. Fund managers have tradition-ally been in a similar position, as the broker-

ages that supply trade ideas have followedthe informal process known as picking up

the phone to disseminate communications.For various reasons, this vagueness was

unsatisfactory, so in 2005, Citigroup, CreditSuisse, Dresdner Kleinwort and Merrill

Lynch got together to build an automatedtrade ideas platform. This allows the sell-side

to provide an audit-trail for its ideas and thebuy-side to measure exactly who is providing

the best ideas.The concept is known as alpha capture,

and the specific platform is called TradeIdeas Limited (TIL). Sales people and ana-

lysts at brokerages who come up with cleverideas can enter them into the web-based sys-

tem. Each entry consists of the suggested

transaction, such as buying a particularstock, the recommended size, the reason for

the tip and the brokers level of conviction inthe idea.

Colin Berthoud, director of youDevise,which developed and maintains the technol-

ogy, says: People have been giving tradeideas, or stock tips, to their customers for

years. We are just beginning to systematiseand monitor how they add value.

Different users find the added value indifferent aspects of the system, explains Mr

Berthoud. Theres varying degrees to which

people care about the content. At the hedge

fund end, the main point is performanceover time, while at the opposite end of the

spectrum, the traditional asset managers usethe content and reasons as an input on their

own trading strategy.He explains that alpha capture systems

came to prominence after hedge fund com-pany Marshall Wace designed an inhouse

tool to filter trade recommendations. It real-ised that if used systematically, the trade

ideas were a source of returns, and set upthe Marshall Wace Tops funds, (Trade Opti-

mised Portfolio System), which rely solely onthe alpha capture system as an investment

strategy.Marshall Wace is no longer the only fund

manager to use this kind of system. DanSquires is joining GSA Capital to manage a

similar fund based on the alpha captureconcept.

The GSA Prophet is being rolled out as adiscrete separate fund, using TIL, he says.

It takes the information, optimises it usingproprietary algorithms, and that forms the

basis for the fund.Because of the power of this system, it

can drive returns. Thats why Ive done thepoacher-turned-gamekeeper thing, says Mr

Squires, formerly a Merrill Lynch hedgefund sales director.

In the early years of this decade, regula-t ors st arted t o look at how b rokerag e

research was paid for. They were not pleasedwith what they found: in many cases, it was

bundled with other services to fund manage-

ment clients and paid for in soft dollar

arrangements, whereby brokerages wereallocated commission by fund managers not

because they offered the best value tradeexecution, but as part of a total relationship.

Regulatory insistence on unbundling,making it clearer how research and trade

ideas were paid for, led to uncertainty aboutthe fate of research departments.

There was a lot of discussion askingDoes research have a value?, says Mr

Squires, currently on garden leave beforejoining GSA Capital. One idea that really

t o ok h o ld w a s L et s m e as u re i t . H eexplains that although there are services

that measure the accuracy of analysts earn-ings predictions, no one had ever measured

what they told to clients.Alp ha c ap t ure sy st ems rec eiv ed t he

approval of the UKs regulatory authority,the Financial Services Authority, in 2006.

The FSA came to the conclusion that: Thesesystems typically give the recipient a sys-

tematic way to quantify and monitor theperformance of different ideas. This can help

them decide which ideas to take forward andhow to distribute commission.

Mr Squires says GSA Capital will pay bro-kers in direct proportion to how well their

trade ideas perform, and that it is not alonein this practice.

Some quite big commission cheques havegone out in the first quarter to investment

banks whose ideas were very good. He addsthat alpha capture systems are not univer-

sally popular in banks, because not everyoneis good at [coming up with trade ideas].

Mr Berthoud has yet to come across abroker who does not have confidence in their

own ideas. The beauty of this from thevendor point of view is that all brokers

believe in themselves.Colin Jowers, a founder director of TIL

and global head of research operations atDresdner Kleinwort, is quick to point out

that TIL itself does not measure the perform-ance of brokers.

It simply provides the information, includ-ing pricing for the trade idea, and clients can

then slice and dice the information as theywant.

Although it would be nice to give brokerssimple rankings, the diversity of ways in

which the buy-side uses the systems meansthat would be misleading, claims Mr Jowers.

He explains that while traditional long-onlyasset managers might use limited numbers

of ideas to reinforce their inhouse research,

some hedge funds might be scanning the

whole range of ideas for short-term tradingideas, and some quant funds integrate the

system into their investment strategy.You wouldnt be comparing apples with

apples, says Mr Jowers, when asked if TILcould provide a listing of brokers ranked

from best to worst in terms of trade ideaWere trying to deliver a standard infr

structure, he says. Its about transparencyif we believe were providing a good service

we want to be more transparent. Then wexpect to be recognised and rewarded.

THE BIG PICTURE

Alpha capture systems, such as

TIL, put the best ideas to useagain and provide usefulreturns, finds Sophia Grene

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2005

The growth of trade ideas*

06 07Oct Mar 08

Sources: Trade Ideas Limited; YouDevise

Trade ideas (000)Buy and sell side clients

* Cumulative figures

Some quite big commission

cheques have gone out in thefirst quarter to investmentbanks whose ideas were good