Challenges and Opportunities for Buy Side in Today’s Trading Environment

Terry Flanagan

The trading landscape of the past couple of years has been characterized by low market volumes, increased volatility and a general avoidance of risky trades—which has brought with it many challenges, but also new opportunities.

And although 2013 has started with a bang with risk seemingly back on the table for now and equities markets soaring, many of the big macroeconomic problems of the past few years are still far from being resolved and the challenging trading environment of 2011 and 2012 may be around for some time to come.

Andrew Parry, chief executive, Hermes Sourcecap

Andrew Parry, chief executive, Hermes Sourcecap

“If you have this obsession of focusing on the short term, if you use that hackneyed phrase, you definitely miss the wood from the trees,” said Andrew Parry, chief executive of Hermes Sourcecap, a U.K.-based asset management firm.

“So the low turnover, the volatility and the inefficiency it sometimes brings is great for us, that is what we are there to exploit for the long term.

“What we are about is long term investing. One of the last true arbitrages left is investing for the long term. With so much money crowded into millisecond trading out to three-month trading, you get an awful lot of noise in the marketplace in the short term and that is a very competitive and crowded space but it does create dislocation that provides the fundamental long-term investor with great opportunities.

“Just think of Italy and the general election result. Markets around the world fell very sharply on the announcement of the result, yet nearly all of the markets bar Italy, which is where all of the problems were, are now way above the levels they were at that morning. The Dow Jones just made an all-time high, the Dax is a few per cent of its 2007 high and Spanish bond yields are all the way back to their lows of the last 12 months.”

Parry says Hermes Sourcecap looks to formulate just “four or five great ideas every year, rather than four or five every hour”.

“There are a lot of starving brokers out there on the back of our activity,” he said.

Others, though, have viewed the markets of the past couple of years slightly differently.

“The markets over the past couple of years have been conducive to active trading with more disparity in stock returns and emphasis on stock selection,” said Najy Nasser, chief investment officer of Headstart Advisers, a London-based hedge fund.

“Managers that have been able to remain nimble and take advantage of short-term market opportunities and flows have flourished. This active portfolio and risk management is being applied across strategies and asset classes to great effect.”

And it seems that a ‘risk on’ approach may well be firmly back on the agenda for the rest of 2013 and beyond as safe-haven assets continue to lose their allure.

“The challenge at the moment is to find good low-risk assets because if you accept that inflation is about 3% depending on how you measure it, the best risk-free asset return you can get isn’t even 0.5%,” said Toby Ricketts, chief executive of Margetts Fund Management, a U.K. investment boutique which specializes in managing risk rated multi-manager funds.

“So when you have taken off your charge of, let’s say, 0.75% you are already losing 0.25% as it is with inflation taking the other 3%.

“In my view, people who aren‘t taking risks have got it wrong at the moment. All they are doing in the end is subsidizing over-indebted governments who are gradually inflating away the value of their debts.

“All the value is in risk assets, but it is all about finding the right sorts of risks.”

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