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Family offices designed to invest and grow the net worth of ultra-wealthy families have grown in number, size, and sophistication. This has been driven by shifting economic and market forces, alongside families’ increasing desire for flexibility and control. By sharpening their due diligence, expertise, and ability to isolate the right combination of idea, team and asset allocation – many family offices have emerged as institutionalized players. These modern offices have established themselves as sophisticated investors in today’s public and private market ecosystem.

Many institutionalized family offices pursue an intensive approach supported by best-in-class service providers. Critical and complex functions—such as portfolio and risk management—are frequently outsourced to experts to attain first-in-class service. Here we examine how outsourced trading can deliver a greater level of institutionalization to family offices, which can be both cost-effective and value generative. With an understanding that each family office has unique and specialized needs, we explore various trading desk models and analyze key points when seeking to maximize the value from traders.

The opportunity to optimize trading

While many family offices have large exposures to real estate and external alternative managers, they also have exposure to yield products in the form of corporate and government bonds, FX, equities, and ETFs. Services supporting these traditional asset classes often fall short when compared to the sophisticated infrastructure family offices have grown accustomed to accessing via their alternative manager investments.

Trading family office assets is one such service with significant runway for optimization. Customarily, family offices have traded their bonds and equity holdings through private banking relationships. Trading through a private bank, however, is expensive and constricted. This approach limits liquidity sources and typically does not utilize professional highly experienced multi-asset traders.

One possible solution: Create an internal trading desk

To address the shortcomings of trading through a private bank, some of the largest single-family offices have built internal trading desks. While this solution provides a key benefit—superior execution—it requires large capital outlays to operate a single-family office, let alone the considerable costs for recruiting a team of top talent to work solely for one family. This strategy also incurs high costs to maintain the systems required to run a trading desk, not to mention the additional operational risks that follow. It is no surprise then that only a small percentage of families set up their own family office.

For most family offices, the value proposition of an internal trading desk is sub-optimal due to likely operational redundancies—most commonly, periods of inactivity during which no trading takes place. Without an immediate value additive task or project to fill the gap when traders have down time, the operational burden and fixed costs of an internal trading desk make it an ineffective solution. Furthermore, internal family office trading teams are often undersized, so execution quality suffers during busy and volatile days.

A more efficient solution: Partner with an outsourced trading provider

Family offices that partner with an outsourced trading provider garner the same—and in most cases, superior—institutional-quality execution generated by an internal trading desk but accomplished at a more efficient cost. Outsourced trading services empower family offices to cost-effectively achieve execution results in line with the high quality of service they have come to expect in the other areas of their business.

Family offices can choose from a range of models to secure the most compelling value proposition. In a variable cost model, for example, a fee is charged per trade. Family offices can also opt to pay a fixed monthly fee for all services rendered. The decision is often based on the number of trades and additional services a given firm requires.

Maximizing the advantages of outsourced trading

When considering an outsourced trading provider, family offices can maximize the potential advantage by partnering with a firm positioned to deliver on key objectives, such as:

• Alignment – Maximum transparency, objectivity and alignment are vital to family offices. As such, it is important to identify an outsourced trading provider that always puts the interests of the family office first and commits to complete alignment with family policies. Family offices should examine how the outsourced trading provider earns money—including rebates, credits and funds earned by favoring certain relationships—and seek to understand the driving forces behind the firm’s overall business model.
  
  At Meraki Global Advisors, our services are conflict-free. We are only paid by our clients for execution; we receive no other revenue streams.
  
• Confidentiality – Discretion and confidentiality are paramount. Family offices should examine an outsourced trading provider’s approach to confidentiality from multiple angles, including the number of clients covered by their trader(s) and legal protections in place. It is also important to understand the extent to which orders are visible as trades flow through the outsourced trading partner’s system.
  
  Meraki’s processes have been engineered to create an environment of ultra-confidentiality. They are tried and tested by $1+ billion hedge funds that place a similarly strong emphasis on confidentiality as family offices. Furthermore, our targeted client-to-trader ratio is 3:1.

• Risk Management – IT security and infrastructure are other operational components of data security that family offices should consider. Cyber risk, improper trade authorizations, data breaches, and fraud are all relevant to maintaining proper risk management. Ensuring your outsourced trading provider has a sound risk management framework with proven effective internal controls is paramount.
  
  Meraki conducts audits of its information and security measures to ensure the protection of all sensitive data. Additionally, Meraki has established Cyber Security Policies, which are periodically updated to mitigate risks.

• Experience – When family offices can rely on experienced traders, they feel confident that a trusted team member is dedicated to helping the office navigate both calm and choppy waters. The ability to lean on a trader’s experience-driven insight into complex situations and during moments of market volatility creates tangible value for the family office. We are experienced in trading global cross-asset. This means we can help family offices build or reduce stakes in companies through equity and/or derivatives trading and help put on hedge trades.
  
  Meraki’s team brings decades of industry experience from top hedge funds, family offices, traditional asset managers, and the world’s preeminent investment banks. With global visibility and acumen across every asset class, we are uniquely positioned to assess cross-product relationships and provide insights into the strength of potential or real market movements.

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About Meraki Global Advisors

Meraki Global Advisors was founded with a rebellious determination to deliver truly conflict-free services to asset managers. Headquartered in Park City, Utah with offices in New York and Hong Kong, Meraki provides outsourced global multi-asset trading, leverage management, and capital introduction services to the asset management industry. Meraki Global Advisors LLC is a FINRA member and SEC Registered. Meraki Global Advisors (HK) Ltd is licensed and regulated by the Securities & Futures Commission of Hong Kong.

For more information, visit the Meraki Global Advisors website and LinkedIn page
Contact:
Mary McAvey
VP of Business Development
(646) 666-7041
mm@mga-us.com

All outsourced trading services are not alike.

In the broadest sense, outsourced trading replaces some or all of the functions of an internal buy-side trading desk with a third-party provider—but as this fast-growing industry continues to establish itself as a critical part of the asset management landscape, it becomes increasingly important to differentiate between the various service offerings within the space. Here we take a closer look at three predominant models for outsourced trading, assess the strengths and weaknesses of each, and discuss several key considerations for asset managers working to identify the optimal choice.

3 types of outsourced trading service models

Services can be separated into three models, defined by their core characteristics.

1. Prime Brokerage / Custodian Model

To enhance their prime brokerage and custodial services in an increasingly competitive environment, custodians and smaller investment banks are offering outsourced trading. The buy-side client has a single relationship with the provider. The execution broker housed inside the provider, a.k.a “outsourced trading desk”, executes trades for the client and passes the execution to their settlement and clearing group. The clients are provided with research, corporate access and other services. The outsourced desk may also have relationships with other sell-side firms for execution, meaning the client is transacting with the provider. Ultimately, the outsourced service provider is the executing broker and stands between the client and other sell-side firms.

Strengths

• Lower explicit execution costs. 
• Outsourced trading commissions are bundled as revenue for prime services

Weaknesses

• Limited execution capability and expertise across asset classes and geographies. 
• Limited integration with investment teams’ idea generation and portfolio management process. 
• Entire desk may see orders, not just assigned trader and backup. 
• Model may create incentive misalignments based on parent organization priorities. 
• Outsourced desk may be in close proximity to institutional sales trading desks. 
• Intermediates a fund’s relationship with its brokers and resource partners. 
• Traditional broker dealers often treat this model as competition. 
• Non-directed order flow may be mishandled, e.g., internalized or routed to payment for order flow (PFOF) parties.

WHAT’S DRIVING THE GROWTH?

Asset managers are facing compounding pressures, including ever-increasing costs associated with operating a fund. To find ways to stay profitable and drive efficient growth, managers have significantly reduced the size of their trading desks in the last 20 years, replacing traders with software. Even so, desks and their systems are still expensive. At the same time, increasingly complex and fragmented markets alongside regulatory and compliance challenges are driving the need for more software and expert traders. These issues only make creating alpha harder, especially for small funds. With many asset managers struggling to justify a million-dollar desk, outsourcing has become a compelling strategy, delivering superior trading services in a cost effective way. In addition to lowering costs overall, outsourced trading creates the opportunity for asset managers to turn a fixed cost into a variable cost.

2. Traditional Agency Model

Strengths

• Hub and spoke model provides clients easy access to a wide broker network.
• Client does not need to be onboarded directly with other broker dealers.
• Outsourced desk may be able to provide written research reports from its broker relationships

Weaknesses

• Limited execution capability and expertise across asset classes and geographies.
• Trading desk may be serving a large number of clients.
• Limited integration with investment teams’ idea generation and portfolio management process.
• Intermediates a fund’s relationship with its valued brokers and resource partners.
• Client’s traditional broker dealers often treat these providers as quasi-competition.
• Non-directed order flow may be mishandled, e.g., internalized or routed to PFOF parties.

3. Pure Buy-Side Model

Providers act solely as the authorized traders for asset management clients. This structure allows the outsourced desk to be a truly independent, conflict-free extension of the client’s investment team, thereby operating in a pure buy-side capacity. In contrast to the models above, the provider does not have a clearing arrangement, conduct traditional brokerage activities, nor have any competing lines of business with clients’ broker-dealers. Clients settle all of their trades directly with their sell-side counterparty which ensures all trades are booked into the funds account and all commissions and/or spreads paid to the sell-side are from the fund. Meraki has pioneered the pure buy-side model, a unique offering which is more akin to “cosourcing” than traditional “outsourcing.”

Strengths

• Ability to trade any asset class including global equities, credit, FX, rates, structured products, commodities, and derivatives. Funds are matched with seasoned traders according to their specialization
• Client maintains direct relationships with their executing brokers and the fund name remains the focal point for resource providers.
• Low client to trader ratio ensures a bespoke high touch service. Traders monitor portfolios, understand themes important to the manager, and provide him or her with opportunistic flows and market color.
• Full access to capital markets teams, stock loan desks, IOIs, and buy-side only liquidity pools.
• Complete integration with both the investment and middle office teams. Traders accept orders in shares, $, or % of AUM and can facilitate settlement of securities and cash management.

Weaknesses

• Limited execution capability and expertise across asset classes and geographies.

Key considerations when selecting an outsourced trading firm

Building upon an understanding of the different outsourced trading service models, asset managers should ask themselves:

1. Which firm offers the greatest value for our needs? 

Some funds are looking for high-touch, experienced trading; others are focused on growing their broker network. Another way to approach this is to ask, which model would your desk most closely resemble if cost weren’t a consideration? Start by establishing core values—from here, it’s easier to weigh the advantages and disadvantages of the outsourced trading models

2. What am I giving up by narrowing down the offerings to a single focus?

If the sum of the lost values is greater than the value of the single focus, then you may want to reconsider your focus. If, for example, you choose the prime brokerage model, are you limiting your resources and creating concentration risk? If you chose the agency model, are you limiting the products you can trade, forfeiting credit for your commission dollars, or receiving subpar execution? And if you chose the pure buy-side offering, do you have the ability and willingness to set up prime brokers, ISDAs and execution accounts with your preferred counterparties?

Important issues around privacy and conflicts of interests 

At its core, the concept of outsourced trading works best when the service provider is structured so that conflicts of interest are removed, and trust is nurtured between both parties. Funds should complete thorough due diligence into a firm’s policies and procedures to detect potential conflicts of interest and identify mitigating measures.

The most important due diligence items include:

• Firm Structure – Is outsourced trading the sole source of revenue for the business or is it part of a larger company? What is the ownership structure? What does FINRA BrokerCheck show about the firm’s registrations, lines of business, and ownership? 
• Handling of order flow – Can the outsourced desk use my fund’s information or order flow to their firm’s benefit and my detriment? Do the firm’s SEC 606 reports reveal that a majority of non-directed orders are routed to Payment for Order Flow (PFOF) parties? 
• Information leakage – How many people have access to my trading information? How many of my peers does my coverage speak with? What is the client to trader ratio? To what extent is the institutional desk separated from the outsourced trading desk?

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About Meraki Global Advisors

Meraki Global Advisors was founded with a rebellious determination to deliver truly conflict-free services to asset managers. Headquartered in Park City, Utah with offices in New York and Hong Kong, Meraki provides outsourced global multi-asset trading, leverage management, and capital introduction services to the asset management industry. Meraki Global Advisors LLC is a FINRA member and SEC Registered. Meraki Global Advisors (HK) Ltd is licensed and regulated by the Securities & Futures Commission of Hong Kong.

For more information, visit the Meraki Global Advisors website and LinkedIn page
Contact:
Mary McAvey
VP of Business Development
(646) 666-7041

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Meraki Thought Piece

Alternative funds have faced a unique set of challenges since the onset of the Covid-19 pandemic, but few have been more prevalent than capital raising – especially for emerging managers. In this thought piece, we explore the fundamental changes and ways managers can thrive in their capital raising efforts over the next 12 months.

Pandemic pushes allocators to stick with what they know

In 2020, the hedge fund community posted one of its best years for absolute and relative returns. This strong performance in combination with a drastic reduction of in-person meetings has led many capital allocators to adopt a “safe harbor” approach, maintaining steady or increased allocations to existing managers. The hesitancy to consider new funds for their portfolio – particularly emerging managers or unproven investment strategies – is driven in part by the heavy weight placed on traditional face-to-face meetings with prospective managers. The lack of conferences and limitations on travel, which strongly curtail opportunities for in-person due diligence meetings, have also made it problematic for emerging managers to simply access investors. 

As a result, many allocators now have overweight exposure to existing managers and large platforms – imbalances which can potentially impact their diversification profiles and hinder the number of distinct alpha streams within their alternatives portfolios. 

From the fund perspective, some established managers and platforms are benefiting from the disrupted capital-raising process. On the other hand, funds with a launch on the horizon are being challenged by longer raise cycles. Raising capital has always been an uphill climb and, unfortunately, doing so during a pandemic is the same climb at a higher altitude.

Here to stay: New digital platforms and communication mediums

The market has adopted new technologies and communication tools which will continue to be part of the capital introduction process as we emerge from the pandemic. As industry participants look to maintain efficiency gains and manage the uneven path toward a resumption of office work, expect these pandemic-inspired developments to endure:

• Digital Platforms – Several prime brokers and third-party marketing firms have set up digital platforms to connect funds and allocators, creating “digital clearinghouses.”
• Video Communications – Virtual meetings are the norm, particularly for international funds and US-based allocators who cannot travel due to lengthy quarantine requirements. Virtual meeting fatigue is as real as in-person meeting fatigue, one must tread carefully.

Five ways managers can thrive in their capital raising efforts

To successfully navigate the transformed capital-raising process, managers would be well served by a renewed focus on the following five areas:

• Scale or fail – Delaying launch shows a lack of confidence, launch with the capital you have, start building a track record, and then speak with allocators. First year costs for a typical long/short fund are $1MM, primarily earmarked for salaries to assemble a core team that balances investment, operational, and marketing expertise. The remainder used for outsourced partners and technology. Be ruthless in deciding what is needed, as opposed to desired, to build a great foundation through strategic planning, budgeting, capital raising, and legal considerations. 
• High-quality deck and pitch – Allocators are inundated with marketing decks. Help them cut through the noise with a succinct deck that clearly articulates the strategy through carefully considered design and written content. The pitch should be honed to suit the strategy and target allocator. To generate the greatest impact, dedicate more of the pitch to the story and less to the deck review. 
• Strategic networking – By working early and often to build strong relationships with the right allocators, managers can draw on a foundation of trust at appropriate times during the fundraising cycle. 
• Thoughtful social media efforts – Managers can make the most of the current communications landscape by using social media to connect with allocators via LinkedIn, Twitter, and other platforms. The positive effect of staying in front of key contacts when in-person meetings aren’t an option is further boosted by sharing, commenting on, or otherwise engaging with the connection’s relevant content. 
• Leveraging valuable advisors – By tapping into a select group of experts and advisors, such as third-party marketing firms, prime brokers, CIOs at friendly funds, and former buyside executives-funds can learn how to best position their offering under the current landscape.

How Meraki Global Advisors can help in your capital raising efforts

As a value-added service to our outsourced trading clients, we help managers create a strategic marketing strategy and increase their firm’s awareness among a unique set of investors and allocators. Our experienced team provides start-up advisory services, identifies actionable ways to improve decks and pitches, and creates prospective allocator lists for select introductions. Our services are suited for a diverse range of clients, extending from traditional long-short emerging managers in the very early stages to managers running a multi-strategy platform and existing multi-billion-dollar funds trading globally across asset classes. 

As the premier global multi-asset outsourced trading firm, we take pride in putting our clients’ interests first. Built on a foundation of confidentiality, our unique conflict-free model empowers funds to garner optimal access to liquidity. 

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About Meraki Global Advisors

Meraki Global Advisors was founded with a rebellious determination to deliver truly conflict-free services to asset managers. Headquartered in Park City, Utah with offices in New York and Hong Kong, Meraki provides outsourced global multi-asset trading, leverage management, and capital introduction services to the asset management industry. Meraki Global Advisors LLC is a FINRA member and SEC Registered. Meraki Global Advisors (HK) Ltd is licensed and regulated by the Securities & Futures Commission of Hong Kong.

For more information, visit the Meraki Global Advisors website and LinkedIn page
Contact:
Mary McAvey
VP of Business Development
(646) 666-7041