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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