When #ETFs Ate The Beta

These days, making a point - and then creating enough initial magnetism to draw folks' attention further down into that point-making exercise - has become quite an art form. Would anyone even notice if a piece of writing had already been published under a different image and title? Perhaps someday we will perform that exercise. ;-) In any case, this post completes the natural progression of our tour of the three primary segments of Alphacution's asset management ecosystem "map" and our attempt to illustrate the overarching driver that is impacting each of them: automation. We started this tour back in July with the highly popular post, When Market Makers Ate Their Own, wherein we showcased how advancements in technical performance by a declining roster of players had led to the current self-destructive extremes of consolidation and concentration within the market-making zone of our map (since relabeled, structural alpha zone). Following on the heals of that came the post When Hedge Funds Ate Their Own wherein we introduced the hypothesis that [...]

By | 2018-11-11T21:54:58+00:00 November 11th, 2018|Alphacution Feed|

#Algorithm: Benchmarking the Cost of Post-Trade Processing

Patterns...  Preferably, persistent and predictable patterns...  It could be said that history is influenced by a series of pattern discoveries whereby new patterns are discovered with new tools, new technologies or new methodologies. Discovery always starts with variance of perspective, like a new pair of eyes.  And, that kind of trick never gets old - even during an era of hyper-intensive innovation. So, with that bit of philosophy as our backdrop, we arrive at today's lesson:  Alphacution discovered a persistent relationship between assets and headcount for asset managers, which led to new insights about strategy selections, technology spending, and workflow automation among a broad community of asset managers, hedge funds and others. This analysis was presented in its initial asset manager technology spending study, the Context Machine (April 2018). Upon further analysis, it turns out that there is also a persistent relationship between assets and headcount for asset servicers, like custodians and administrators. The significance of this discovery represents the beginnings of our ability to benchmark asset servicing costs and [...]

By | 2018-09-09T22:58:36+00:00 September 9th, 2018|Alphacution Feed|

Exposing Franklin Templeton’s Greatest Challenge: #ETFs

Exchange-traded funds (ETFs) may have their critics, but with nearly $3.5 trillion in total value represented by over 1,900 unique funds as of June 2018 (according to the Investment Company Institute - ICI), this segment of the market has grown faster and is now larger than total assets under management (AUM) of hedge funds (which BarclayHedge estimated at nearly $3.0 trillion for Q1 2018). Success is always the sweetest revenge... Sure, the naysayers point to numerous complexity factors - like variance in replication methods, tracking errors, liquidity issues, exotic-exposure risks, and others - to make their cautionary case and to send up warning flares to novice investors, but the blunt fact of the matter is that the well-designed, cost-efficient ETFs have had a profound impact on the financial landscape. That the downward trajectory of fees with competing financial products (like hedge funds and mutual funds) and the dramatic shift in asset allocations toward ETFs are among the most commonly cited attributes of the shifting landscape is obvious to most by [...]

By | 2018-08-14T22:50:52+00:00 August 14th, 2018|Alphacution Feed|

Virtu: Q1-2018 Update on Extremes

With volatility spiking in Q1 of 2018 - and the successful porting of KCG's intellectual property (IP) prior to that in late 2017 - VIRT earned a welcomed reprieve from the conditions of recent quarters, as we predicted here (and elsewhere prior to that). In the exhibit below, Alphacution's as-if modeling of the combined entity - Virtu + KCG pre-Q3 2017 - yields a level of net trading income that would not have been seen since Q1-2016. Meanwhile, Alphacution's tracking of adjusted net trading income per employee - a proxy for our common look at revenue per employee (RPE) - starkly illustrates the path through the most recent maneuvers: Persistent declines in top line "productivity" since its most recent peak in early 2015 ultimately led to the acquisition of KCG, which closed in July 2017. Swift transfer of KCG's IP onto Virtu's infrastructure along with elimination of redundant technology and human capital allowed this productivity measure to bounce off its lows in Q3 2017 to finish the year as strongly [...]

By | 2018-06-21T20:28:30+00:00 May 15th, 2018|Alphacution Feed|

Context Machine: Introducing a Techno-Operational Benchmarking Framework for Asset Managers

Executive Summary Riding the wave of the FinTech juggernaut, technology now permeates all aspects of the financial services ecosystem; front-to-back, top-to-bottom and across the entire business segment spectrum. Any lingering gaps between technology strategy and business strategy are closing; making them indistinguishable from one another. And yet, for all the promise of the revolutions in artificial intelligence, cloud and big data, such attempts are met with unforgiving challenges. Most players in this ecosystem are still using dulled intelligence tools to navigate this rapidly changing and increasingly techno-centric landscape. Finding balance between the primary engines of productivity - information technology and human capital - continues to be conducted like a game of Marco Polo. Operational alpha - a kissing cousin of terms like digital transformation and process re-engineering - is a growing theme among the pantheon of new vernacular in this space that seeks to illuminate such challenges. However, despite its descriptive elegance, operational alpha remains an emerging and elusive concept. In the midst of an evolving supply chain, solution providers [...]

By | 2018-05-25T22:47:20+00:00 October 31st, 2017|Alphacution Feed|