PROVING OUR CASE

Hedge fund workflow (prior to adoption of AFA’s technology)  

ABC Capital Management is a convertible arbitrage hedge fund with $55mm under management. ABC Capital had two prime brokers, each of which had offered their proprietary trading platform for trade executions. ABC’s trading process was highly fragmented and difficult to manage. Once a decision was made by the portfolio manager, the trader had to manually calculate how much to trade with each prime broker then manually input orders on the two separate trading systems.

The portfolio manager was concerned about giving his order flow to the execution desks of his prime broker for several reasons. First, he was not comfortable knowing that his prime broker, which maintained their own proprietary trading desk, could see his order flow. He wanted some way to trade anonymously in the market without revealing his strategy to the prime brokers.

Another important issue for the trader was best execution. The trader felt that his orders were not always receiving the best possible service or price improvement from his prime broker’s execution desk. He was frequently unhappy with the quality of executions that he would receive on orders.

Using multiple brokers for execution of the same instrument also created logistics problems. The two prime brokerage accounts would receive different execution prices for the same instrument, which made his back office bookkeeping operations difficult. Since the fund was interested in raising additional capital, this issue of average pricing created a major obstacle to winning new investors for the fund.

At the end of the trading day, the trader would manually type up flat files of trading activity in order to submit them to the prime brokerage group. This would take a substantial amount of time, and caused frequent errors with trade breaks. The entire process was time consuming and difficult.

Costs of Managing Current Trading Process:

• Lack of anonymity
• Poor execution quality
• No average pricing
• Errors due to manual communication
• Frequent trade breaks
• Inefficient workflow & waste of valuable time

ABC Capital Management Needs:

Hedge Fund Work Flow – (after implementation of AFA’s technology)

Once the hedge fund implemented IMPACT Pro™, it enjoyed significantly improved workflow efficiency. The trader has direct electronic connectivity to several liquidity pools, including preferred brokers, ECNs and market makers. Trading is controlled through advanced trading tools and market participation is completely anonymous. Brokers and ECNs do not know that orders are coming from this specific customer, and the customer’s strategy is effectively concealed from the street. Trader has access to advanced tools such as list trading, VWAP orders, time slicing and can provide hidden liquidity via discretionary bid/ask volume display. Once trades are entered into IMPACT Pro™, fills are reported back instantaneously and time stamped. Trader has access to time & sales information to ensure that he is receiving best execution.

Once trades are completed, the trader can generate several different customized reports to summarize daily trading activity. The customer can generate daily activity audit trails in order to satisfy compliance requirements mandated by certain customers. The audit trail shows not only trading level activity, but also allocation level activity to demonstrate that accounts are being managed on a pari passu basis. This has established sufficient operational control of trading activity to attract new investors in the fund. Moreover, the trader can automatically allocate based on predefined templates in order to further streamline the process.

At the end of the day, the trader can seamlessly export all trading activity and allocation instructions to each prime broker independently via a flat file interface. Each prime broker sees only those trades that are assigned to an account, and only after those trades have been executed. In addition, executions across accounts all receive an average price, which has helped to attract new investors. All manual processes for trading, allocations, and input to various back office systems have been integrated within the IMPACT Pro™ interface. ABC Capital Management has achieved straight through processing of its trades and in the process has significantly reduced operating expenses.

IMPACT Pro™'s Benefit to ABC Capital Management:

For more information, contact (212) 286-1245 or visit us at www.afapp.com