In mid-2019, Spanish asset manager Bestinver acquired local boutique Fidentiis in a deal that added around € 350 million in assets under management to Bestinver’s € 7 billion portfolio.
The merger increased the number of funds, portfolio managers and analysts at Bestinver, creating a unique challenge for the two traders who cover the company’s execution as the world battles the global pandemic.
Based in Madrid, Alex Roselló, Head of Trading, and Gustavo Iglesias, Equity Trader, are responsible for all executions at Bestinver, primarily trading equities in the EMEA, US, Latin America and Asia markets for all funds . It has traditionally been a long only fund asset manager, but it also has a hedge value fund that holds derivatives and shorts, as well as a national long short fund.
The two-seat trading operation functions much like a UK office compared to the traditional Spanish centralized office on the buy side, with a strong influence from the City of London, as many portfolio managers, past and present, have passed the most of their career in the Square. Mile.
Roselló also spent time during his career in London working on the sales side for Deutsche Bank and KBW before moving to Bestinver in Madrid in 2015. Likewise, Iglesias previously worked on the sales side before starting at Bestinver three years ago. years. . While Roselló emphasizes the strengths of his relationships, Iglesias has developed a technical skill set, learning coding and tool development and supporting vital Transaction Cost Analysis (TCA ) from the office.
Both traders agree that their experience has provided a full understanding of how both sides of the market work and cemented some very important relationships in the industry that impact the office’s access to information and best practices.
“When I started at Bestinver to run the office, it was like we had order people in the sense that they would pick up an order, send it straight to a broker and pick up the fulfillment at the end of the job. day with little intraday, ”explains Roselló.
“I was used to the UK buying office. We started removing the processes for passing the entire work order to the broker and started looking for the high liquidity in different places and trading based on merit and volume they could get. Although we are based in Spain, in many ways we trade as if we were a London buying office in Madrid.
Change of strategy
For Roselló and Iglesias, the transition to distance commerce due to the global coronavirus pandemic was a bit more critical than for businesses with a larger team of traders given the difficulty if both were to fall ill at the same time. Although the adaptation to working from home was relatively smooth, the fight against intense market volatility and additional funds from the merger of Fidentiis, which doubled the number of orders to be executed and increased their notional volume by more. by 50%, was more difficult.
As blocks in conditional cross networks increased in the early stages of volatility, traders struggled to convince high impact traders to cross as they preferred to execute small blocks and trade during the session. This improved in the months following summer 2020, but it forced Roselló and Iglesias to rethink their strategy on the algorithms they used to improve and speed up their cash-seeking processes.
“In the beginning, we were doing more electronic commerce, including blocks in crossover networks. At first it became more difficult to reach people on the high contact side and we often heard about working from home as an excuse for the delays, ”says Roselló.
“Not all businesses were well prepared and organized at the start. Once volatility set in, natural blocks became much harder to find and counterparties preferred work orders over cross size at a price that might look bad at the end of the day.
The strategy also changes considerably depending on the market that traders are dealing with. Iglesias believes that studying and adapting to an ever-changing market structure in the world is one of the biggest challenges for buy-side traders looking for liquidity today. In one example, it reveals that data from an in-depth analysis of the ATT in 2019 reported high costs in executions in the United States, which accounted for about a fifth of the total negotiating table volume that year.
After further investigation, analysis of the trading strategy and discussions with experts, traders adjusted their strategy according to changes in the structure of the US and European market. The new strategy was to seek more blocks, increase the use of e-commerce, and strengthen relationships with their American counterparts.
“The US market may seem liquid and simple at first, but it’s a bigger challenge than you might think given that the structure of the market has little to do with the structure of the European market,” says Iglesias.
“Through TCA, we found our fulfillment costs in the US to be above average and we experienced some signaling risk due to the fragmented nature of the market. We moved on to maximizing block liquidity, tweaked our algorithms to get to the right sites, and got bold on our arrival, turning the United States into one of our top performers. Strengthening our relationship with the United States and building new relationships has also made a difference.
“We are constantly monitoring our trades to find these patterns that increase our learning curve. We strive to understand the reasons for our underperformance or outperformance in execution. The biggest challenge in big data analysis is getting meaningful information that shows significant explanatory power – it takes a lot of work before something starts to make sense.
Coverage and juniorization
The trading desk does not automate a lot of trading activity as they mainly trade large orders with multi-day volume. Like many buy-side traders, the duo strive to add value to every trade. Lower nominal trades for smaller funds often present opportunities for the pair to significantly reduce implied costs by choosing the right strategy, which may differ from day to day.
“For small transactions, automation can be tricky when we see the liquidity structure constantly changing,” adds Iglesias. “We all know how far the emphasis on both research and liquidity has moved from small businesses. We understand the challenge that local brokers face. But at the end of the day, there’s a lot of alpha in that local expertise. They can find that unique liquidity that will save us the day as traders. We highly value the local brokers that we have.
Brexit presented other hedging challenges for both traders. As a relatively small asset manager based in Spain, if traders go to a broker in Madrid who may not be able to meet their needs, they often turn to the London office for further assistance. .
However, as the structure of the market changed after Brexit, Roselló explains that coverage of many contacts with the office’s UK brokers has deteriorated. There is some confusion among brokers about how best to serve European clients after Brexit and each company has a different interpretation. This was detrimental to the important relations of the office in London.
“As a European company, we encountered difficulties in hedging”, adds Roselló. “Previously we had a lot of access and enjoyed our relationships with sellers and our direct relationship with the trading offices in London. But due to different interpretations, it felt like we were cut off by a lot and some of the UK offices were no longer serving us as they used to be.
“This meant that we often had to speak to offices in other European hubs where we had no connections, and in most cases with more junior coverage. It doesn’t matter much to UK based asset managers because it’s transparent, but as a European buying house that trades UK and global markets through UK offices it has was incredibly tricky for us. “
Despite the London influence, Bestinver remains a Spanish company with three major national funds. Following the merger with Fidentiis, the flow of the desk in the Iberian Peninsula has tripled but Roselló emphasizes that the size of the Spanish market remains the same.
With three times the volume in a market that hasn’t changed, liquidity has become harder to find for both traders. But as the new portfolio managers joined Bestinver after the acquisition, not having had any traders in their old firm, Roselló said the benefits of a centralized buy-side trading desk became evident.
“Our new portfolio managers are happy and appreciate the implicit costs you can save by having a good trading desk,” Roselló adds. “It adds value to them, the funds and the investors. There are technologies in development that some people fear will one day take over the long traders, but we really see technology as an empowerment tool, and you need to use new technology to your advantage.
For both of Bestinver’s trading teams, despite the challenges of hedging and changing market structure, their focus remains block supply and liquidity. As they continue to manage more complex relationships with their brokers and deal with the huge increase in volumes after the merger, Roselló and Iglesias are rightly proud of their ability to adapt as a team during this time.
“In our profession, it is a constant learning to see the markets evolve at the speed of light. As buy-side traders, we need to learn from each other and be smart about how we use technology. It is the art of adapting our strategies to better understand liquidity that should make us unique, ”concludes Iglesias.