03.14.2012
By Terry Flanagan

Active Managers Take Fight To HFT

The traditional buy side has long viewed high-frequency trading as a pest, but the buy side is now fighting back to tame a pest that has grown very sophisticated.

Global capital markets have grown so complex and widespread that investors have a plethora of ways to trade by accessing a variety of instruments. Portfolio managers preach that institutional investors need to go beyond the typical 60/40 stocks and the bond asset allocation model, and include ‘real assets’—which include real estate, commodities, metals, short-fixed income and natural resources; often bucketed in an institution’s alternative portfolio.

While trading these assets can happen passively, or actively, through long/short strategies, futures, real estate investment trusts or natural resource equities—some market participants are pushing for an active, long-oriented strategy despite the costs at a time when the marketplace has seen an influx of high-frequency traders.

“The markets can become very transparent when someone puts on a big trade,” said Yigal Jhirad, senior vice-president and portfolio manager of the Cohen & Steers Real Assets Fund. Jhirad is also director of the firm’s quantitative strategies, and a proponent of active management, who cited that the level of exploitation seen by HFT in the equity markets is easily transferable to the commodities markets.

“The problem with passively managed strategies is that it can sometimes lead to rules,” he added. “It’s the week of futures’ expiration and you may need to come in every week, at the same time, to trade—[HFT] traders will figure that out. The market is smart enough to get in front of that; they all know that you’re trading oil on a Wednesday afternoon, and they’ll exploit that.”

For Jhirad, active managers warrant their sometimes-costly fees because they know how to keep a tight lid on trading and are “cognizant of their trading environment”, a state of mind that thereby helps skirt around HFT’s predatory moves, and “keeps the market on its toes”.

“Predictability in trading is not good, and being transparent in your trading is not good for execution—auto-pilot is not the way to go,” Jhirad told Markets Media.

Active management may be Jhirad’s preferred approach to real asset exposures, and the time to get in is now, he says. Only 2% of total institutional assets are invested in real assets, whereas Jhirad would like to see industry-wide penetration hovering between 10% and 20%.

The Cohen & Steers Real Assets Fund, which launched on March 7, is a blend of real assets. While the firm prides itself on its actively-managed real estate expertise, a multi-manager option is also paramount in ensuring that investors get the best real assets coverage.

“We’re not specialists in the commodities futures space, so we’ve hired an investment manager to sub-advise that portion of the fund—those with long track records in that space,” said Jhirad. “We’d like to think we’re crafting this fund as a diversified line-up and nice mix of assets, where we have a disciplined asset allocation approach and are not too concentrated in each asset class. The risks of market timing are far greater than the reward.”

The fund’s commodities investments will be sub-advised to Gresham Investment Management and its global natural resource equities will be managed by Investec. Cohen & Steer’s push for real assets is a mantra that investors need to be prepared for in potential rainy days ahead when high volatility, as seen in the aftermath of the financial crisis in 2008, will re-spike. For now, reduced levels of volatility have shifted market participant focus back to equities but some warn that such shifts are merely cyclical.

“There’s a shift in asset allocation from commodities to stocks, because everything goes in cycles,” said James Debevec II, portfolio manager of the privately managed Absolute Value Fund.

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