INVESTOR PERSPECTIVES
On top of that, investment managers more used to ERQG DQG HTXLW\ PDUNHWV GLG QRW FRQVLGHU ZKDW ZDV going to the currency elements of their deals. “Managers’ primary focus is on international asset selection, where the majority of return is determined, and the currency funding trades had less scrutiny, as the prevailing wisdom dictates the currency market LV KLJKO\ OLTXLG DQG LQH[SHQVLYH WR WUDQVDFW LQ 2XU data challenges this notion for the trades delegated to the custodian under standing instructions,” explains McGeehan.
It’s another point of view with which DuCharme agrees: “If you said to a manager a couple of years ago that you could gain nine basis points, they’d just VKUXJ DQG VD\ WKH\ KDG ELJJHU ÀVK WR IU\ ,W ZDVQ·W worth the effort. Now it’s different, and it makes sense to deal with the issue.”
“That’s why we’re seeing the traders who now XQGHUVWDQG FXUUHQF\ ULVN GRLQJ VRPHWKLQJ DERXW LW ² LQ GLIÀFXOW PDUNHWV ZKHUH ÀQGLQJ DOSKD LV GLIÀFXOW there is an even greater focus on retaining as much of that alpha as possible during the implementation process,” offers Peter Eggleston, head of the Quantitative Solutions group at Morgan Stanley.
In addition, the default setting for handling the currency element was that it was considered an administrative task, and operationally it was easier to send it through to the custodian, especially to be certain the trade would not fail. One other reason for a lack of interest in TCA was that gathering data for WKH SURFHVV ZDV GLIÀFXOW 8QOLNH HTXLWLHV WKHUH DUH
QR XQLÀHG PDUNHWV RU WUDGLQJ YHQXHV LQ RYHU WKH FRXQWHU PDUNHWV VR WKHUH LV QR XQLÀHG H[HFXWLRQ WDSH The disjointed nature of the FX market compounded PDQDJHUV· DSDWK\ /LTXLGLW\ DQG SULFLQJ LV VSOLW across trading platforms and direct trades between counterparties.
Lack of time-stamping -XVW WR DGG IXUWKHU GLIÀFXOW\ XQOLNH HTXLW\ WUDGLQJ many banks have no time-stamps on currency trades &RQVHTXHQWO\ PDQ\ PDQDJHUV KDYH DVNHG whether that would make ensuring a reliable form of SHUIRUPDQFH PHDVXUHPHQW WRR GLIÀFXOW
“In order to perform an accurate transaction cost DQDO\VLV \RX JHQHUDOO\ UHTXLUH NH\ VHWV RI GDWD including time-stamps. In many cases, we have found that institutions are not able to provide such time- VWDPSV UHODWLQJ WR WKH RUGHU ÁRZ DQG H[HFXWLRQ RI currency trades. In addition, there is growing demand for standardisation of performance benchmarks,” says Eggleston.
For many in the industry this lack of time-stamping, for example, is unbelievable. “We’re stunned that it has been going on for so long,” says DuCharme.
But the fact is, even with the obfuscation of these numbers, systems can still analyse the transaction costs. “You might not be able to provide the full analytical rigour as you would if time-stamps were available, but you can still provide indications of whether the execution is fair,” warns Eggleston.
Autumn 2011 | Currency Investor 31
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