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A one-click approach to accessing alpha

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By James Williams – EXANTE is a unique integrated trading and fund platform offering whose genesis grew out of a challenge faced by its five managing partners. All of them came from a trading background and shared a similar evolutionary path when working with different brokers and banks globally, developing algorithms and trading strategies.

As Gatis Eglitis (pictured), one of the managing partners, tells Hedgeweek, once they started to launch their own hedge funds, they encountered a challenge: each time a new entity was set up for proprietary trading it involved having to set up new relationships with counterparties. Actually getting everything set up and structured was a timely, inefficient process; something that EXANTE’s managing partners observed was also proving to be a problem for fellow friends running asset management businesses.

To meet this challenge, EXANTE was established in March 2011. It received its licence from the Malta Financial Services Authority end-June 2011. Unlike other fund platforms, EXANTE is an organic institution, blending multi-asset fund support with first-class trade execution services using a sophisticated technology infrastructure.

Says Eglitis: “We know exactly what are the needs of fund managers. We talk the same language, when they ask for a service we immediately understand their requirements because we’ve been in their shoes. Similarly to grandma’s cookies which taste much better than those from a store, we initially designed the infrastructure for self-use only. Our platform is therefore more intuitive and easy to use in comparison to others.

“We’ve made it our mission to design a first-class infrastructure and view ourselves as a benchmark of transparency in the financial services industry. The fact that our customers are running successful cross exchange and asset class arbitrage proves that we are fulfilling our mission statement because the business of arbitrage requires superior infrastructure and transparent execution.”

Although not exclusive, there exists a quantitative/high frequency trading slant to EXANTE. This is understandable given the managing partners’ backgrounds. Picking up on the trading challenges referred to earlier, Eglitis explains: “Every asset manager faces an exhausting relationship establishing processes with counterparties. They find themselves having to deal with multiple brokers and departments to negotiate commercial conditions, credit lines, risks and connectivity issues. In some cases this process is so slow that either market opportunities or customer assets start flooding away.

“This story is common to all managers that deal with multiple asset classes like currencies, fixed income, commodities, stocks and futures. They end up juggling numerous platform providers, connectivity gateways, data vendors, and are forced to deploy a sophisticated buy-side back office tool to calculate the portfolio NAV at the end of each day.

“So the niche to us was obvious: we couldn’t find any broker giving quality DMA access to all markets and instruments with competitive conditions, advanced STP capability and real-time risk monitoring from one account. We created the business for ourselves to overcome these problems and complexities, using the best technology ingredients. Today we share this solution with our friends and asset managers facing similar challenges.”

Trading and hedge fund listing are two separate core offerings with EXANTE. The latter is a similar concept to fund listing on an exchange with the sole difference being that it is done on a trading platform. On the platform, hedge funds are treated similarly to cash equities. For any manager wishing to join the platform, which already includes a number of billion-dollar funds, EXANTE’s team works closely with them discussing the strategy in detail, and ultimately deciding whether the manager is good enough to list on the platform.

EXANTE’s fund platform is potentially a game-changer for the industry. Currently, it has 35 investment management companies, managing around 100 funds. The one-point-click model gives investors the opportunity to invest directly in those funds. More importantly, for hedge fund managers they can trade fast and efficiently, across asset classes, in addition to benefiting from the marketing opportunities that arise from listing and potentially attracting new investors.

Anyone can view the funds. Potential new clients can simply download a demo for free, familiarise themselves with the interface and the funds composing EXANTE’s index, and decide whether to open an account or not. Minimum investment, confirms Eglitis, is USD1million.

Key platform features

The first point to emphasise is that no one else is giving qualified investors the opportunity to directly invest into hedge funds on such a platform. The fact that all the funds are listed means investors can rotate into and out of different managers as they wish, and actively manage their portfolios directly. They can either build their own fund of funds, or choose to diversify their risk and take broad exposure by investing in the index of managers which EXANTE is now building.

“This allows investors to ultimately have full control of their investment, instead of depositing with a bank where risk is not transparent and the premium is close to zero,” says Eglitis.

Secondly, all the funds listed on the system have gone through due diligence. That sets it apart from other fund databases which list funds, but cannot claim to have done due diligence on every one. “There are lots of funds that we have approached from various databases that we cannot place on our system because we are reluctant to expose our customers to such managers. What we offer is quality content,” states Eglitis.

Third is the level of transparency it offers clients. People can see the performance and price of each fund just like any other financial instrument. Going forward, Eglitis says the platform will provide full fund profiles and allow users to filter their searches: either by geography, strategy, size of fund or other criteria.

On manager selection, Eglitis stresses that the critical factor is the ability to generate meaningful alpha. In that sense, EXANTE is not too concerned about the types of strategies on the platform, but rather their quality. “What counts when assessing a manager is the audited historical performance chart as this shows past volatility. If performance is exceptional we make sure that there is nothing lying underneath the tip of the iceberg. If not, we are happy to work with them and list their fund.”

One interesting future development will be the creation of a ratings system for those managers listed on the platform. This, though, is not an immediate focus: rather it’s on building out the index. Eglitis explains how this is created: “We take the 20 top performers to currently construct the index. Going forward, that figure will climb to 50, 100, as we look to develop a benchmark of top performers across all asset classes. The managers chosen will be based on a series of quantitative and qualitative criteria such as year-on-year returns, Sharpe Ratio, Sortino Ratio, managers’ edge in the field, etc.”

Such has been the success of the underlying managers over the last two years that “If you had invested in the EXANTE Hedge Fund Index in March 2010, you’d currently be up 36.4 per cent,” notes Eglitis.

Actual AUM on the platform is USD1.5billion. Looking ahead to the remainder of the year, Eglitis comments: “We already have a pipeline of 100 managers. We hope to have 100 managers listed on the platform – including the 35 existing managers – by the end of the year.”

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