The strategic edge of multi-asset trading in a volatile world

May 8, 2024

Multi-asset investing is not a new concept, but it has gained traction over the past few years as the buy-side sought additional cost-savings while mitigating risks and generating stable risk-adjusted returns. This has become increasingly important as market conditions have become more tumultuous and uncertain.

According to the Boston Consulting Group, these strategies along with passive investments, have been the fastest-growing segments of the global asset management community during the last decade. It calculated that the value of these funds soared to $11 trillion of assets from $2 trillion between 2018 and 2018.

However, it has not been a smooth ride and the pace of growth slowed during the pandemic and in the post-Covid years due to a series of unexpected events which caused bonds and equities to behave in the same way. It was not only the shifting macro-economic dynamics to a higher inflation and interest rate backdrop, but also a war in Ukraine and, more recently, escalating tensions in the Middle East that caused investors to press the pause button.

Benefits of multi-asset trading

The long-term advantages of diversification, though, were never in doubt and multi-asset funds have come back into the fold as market participants have adjusted to a more unpredictable world. The difference today is that asset managers are casting their nets over a much wider opportunity set to capitalize on the different market directions and identify the correlations between them.

From a tactical asset allocation perspective, a multi-asset class approach enables investors to reallocate capital to asset classes, sectors, or instruments that show the most potential for gains at different stages of the business cycle. The insights gained also sharpen their ability to hedge and deploy the most effective management strategies to offset short-term risks in core investments. For example, if an investor has a large position in equities and expects short-term market volatility, they might hedge by taking a position in derivatives using options or futures.

Is multi-asset trading always best?

In good times, a condensed portfolio focused on a narrow range of assets will generally deliver better performance. However, a more varied portfolio offers downside protection and makes investors less vulnerable to market swings. This was evident last year during the mini-banking crisis when some fund managers were left overexposed to the banking sector.

This is reflected in research by FE Trustnet cited by a recent article in Forbes. It found that total returns for a concentrated portfolio were 35% compared to the 29% of its diversified counterpart for the five-year period ending 25 October 2023. Digging deeper through the years, though, reveals that in 2020 the diversified holdings generated a 9% return, fractionally behind the 10% of its concentrated peer; but two years later, the former limited its losses to 4% versus 9% for the compressed version.

Building a multi-asset trading desk

Given that multi-asset investing is now an integral part of an asset manager’s investment strategy, brokers will be expected to have a fully-fledged, comprehensive, and competitive service that can trade across the asset class spectrum. It also means catering to asset managers’ requirements for hedging, diversification, and allocation and providing access to non-member markets, for example, via swaps trading.

Reconfiguring trading desks may present some hurdles, but the benefits outweigh the challenges. For example, maintaining several different trading desks equipped with specialized tools is an expensive proposition especially when commissions are falling and margins are being squeezed. Moreover, having one trading platform makes it easier for traders to share market color and take advantage of the synergies between various asset classes. This enables them to provide asset managers with more detailed information which will enhance their portfolio management selection.

Rationalizing processes

Using a multi-asset trading platform, though, is not just about front-office efficiency but also the operational gains of rationalizing various trading and settlement processes. These include:

  • Centralizing trade management across different asset classes minimizes the likelihood of errors. This is because a unified system reduces the complexity involved in handling multiple systems, which can often lead to mistakes.
  • A consolidated view across all assets improves efficiency and reduces operational risk. This is especially true for complex trades that are executed across multiple asset classes, such as FX trades used to manage currency exposure for an equities trade.
  • A streamlined operation also extends to post-trade, where a single system can handle settlements, reducing manual interventions and mitigating risks.
  • Multi-asset trading simplifies risk management on a per-account and trading-asset basis, allowing for efficient monitoring and compliance with regulatory requirements. It enables greater efficiency and scalability with traders managing execution and hedging more effectively, using technology to observe markets and provide insights.
  • A single solution reduces the time required to train staff and makes it easier for them to respond quickly to changing requirements and market conditions. Individual traders can work more effectively across multiple asset classes.

A software solution is not a binary choice

Unsurprisingly, finding the right software solutions to facilitate multi-asset trading is paramount. However, even for a multi-asset trading shop, a one-size solution may not be the answer. It does not have to be a binary choice given the various requirements of trading several asset classes. For example, a broker might choose a single solution for their core markets, while maintaining separate systems for other assets that require more bespoke functionality.

The key to success is interoperability because it offers the benefits of a cohesive solution without having to commit to a full migration. There are several different routes to achieve this, ranging from the use of standardized data formats to API access to core functionality. Brokers will choose different options depending on their requirements, but if they want to stay firmly in the game, they will need to offer access to a wider range of asset classes for their buy-side clients.

Vendors must also evolve with the ever-changing trends and be ready to offer solutions that provide rich functionality, broad market access, and interoperability that can address the obstacles and facilitate the process.

ION Markets

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