Welcome to this episode of “Meet the Meraki Team.”
Meraki Global Advisors, a leading global multi-asset outsourced trading firm, was founded with a rebellious determination to deliver truly conflict-free services to asset managers. At Meraki Global Advisors, our team is our greatest asset, and today, we have a special guest to share his wealth of experience and expertise.
Joining us is David Laub, a seasoned trading professional with an impressive background in the investment industry. David has led trading desks and overseen various trading functions, gaining invaluable insights from both large platform funds and smaller organizations.
In this episode, David will take us through his journey, sharing valuable lessons learned and how each experience shaped his approach to trading and risk management. This promises to be a captivating conversation with a true industry expert.
“Every PM has their own mosaic about how they think of things. The best PMs are unbiased about whether they believe a stock is a long or a short; the mosaic tells them which it is. So, if we can help add a few pieces to that mosaic, then maybe we are doing our job.”
Let’s dive right in!
Q: Walk through your history on the buyside and what roles have you filled over your career leading you to the path of outsourced trading?
I started at Hunter Global Investors, a Tiger Cub spin-out, overseeing the trading desk and other trading functions. I went to work for the individual that oversaw the financial space for an original Tiger Cub. After Hunter Global I joined a large platform fund and was there for just under 4 years.
A great benefit to being at a platform fund is that it really teaches you to be able to look at things on a relative basis. You had to be sharp because your portfolio managers were very diligent. Most platforms only allow for portfolio managers to traffic in one sector, so they become incredibly adept with all the names. For instance, some PM’s only traded tech, and others that only traded consumer, industrials, etc. but all had very tight net and gross limits that they were allowed to position around. That substantially limited them to what actions they could take, so you had to really be on top of your game as far as understanding the differences between every name in their space. So, in a way, that was my boot camp for understanding the relative world.
I was lucky enough to be approached by a gentleman leaving a macro focused firm 3+ years into the platform experience who wanted to start his own fund and offered me the opportunity to head trading there. I was with that fund for about three years. Unfortunately, the fund ran into some performance issues. It was a very good lesson in observing how portfolio managers manage risk from two different points of view, how to navigate the market itself but also how to navigate explaining their actions to investors.
All my experiences culminated in my education for how I try and help portfolio managers make sure that they’re seeing as much as possible while trying to navigate those 2 different risk points on their individual compasses.
Q: What excited you about joining Meraki Global Advisors and outsourced trading?
It was a two-stage approach. First, I did not want to be tied to just any one manager’s performance. It can be something that is largely out of any trader’s control. You can be working with an excellent portfolio manager, who happens to be a wonderful person on top of being incredibly diligent, but there are simply unforeseen risks out there that nobody will see coming. I wanted to work to alleviate that risk. Outsourced trading was one of the best ways to do that. So, then it became a matter of doing my homework on outsourced trading.
I have good friends that are in the business. I was privy to a fair amount of information about how it worked, where people had strengths and weaknesses. When I came across Meraki, I liked the strength this firm has demonstrated internationally. The two founding members have spent significant time internationally, which I thought is a competitive advantage.
Q: With that diverse skill set, tell us what areas of the market or the hedge fund trading landscape you focus on now.
It depends on the portfolio manager that you’re working for. Where we find one can add the most value is this: if the portfolio manager is not keen to focus on risk metrics, we will try to add that to their perspective by monitoring and highlighting those we think may be impacting the portfolio. For instance, if you get a good fundamental bottom-up stock picker, and the PM knows the five or six names they really like but are exposed in just two sectors, are they aware of their concentration risk? If they are limited on sector risk by their mandate, then they will be, but if not, will their investors allow for this? We are keeping an eye on those things so that they don’t get to the point where their exposure is too concentrated, especially for sophisticated investors.
Now if we are trading for someone that is coming from a well-known platform, then they are already focused on that. We find that people from platforms are much more focused on what others are thinking about their space. Most of the platform spin outs are exposed to multiple risk factors that control their optionality in whatever sector they are trading. They get it on managing their risk.
A large majority of the PMs are talented enough to have succeeded to such a level that they are now able to open their own shop. They know their names as well as any on a fundamental basis, so many look for an edge. That edge seems to reside somewhere between trading flow and game theory. The structure of the platforms comes into play here. If there are 4 or 5 large platforms that all have at least 3 or 4 portfolio managers in each sector, the total number of pods trading the same space can easily reach 15 or 20. If each pod has an AUM roughly around $500M, then that quickly adds up to multiple billions watching and trading a sector with itchy trigger fingers.
These PM’s would like to know what will make the others in the space take action. What is enough to force others to trade and then be able to take that same action just before whatever catalyst that is the game theory thesis. This concept makes them much more sensitive to what the chatter is around each and every name, what other investors are saying around those names and the flows in each name that follow. So, of the 20 people trading one name, it’s ok to be the 3rd, 4th, or 5th to take the same action, but being 18th or 19th would be costly if the name is overtly consensus.
So, the answer to the focus depends on whether it is more of a fundamentally focused portfolio manager or a platform-oriented one that’s already been exposed to the circus.
Q: How do you differentiate yourself with your buy-side background relative to others?
This can be a nuanced question from the standpoint that there are lots of very good people out there. I worked with plenty of very talented people at a platform, but I got the subjective feeling that so many were focusing on the minute relative differences of their sectors. Since they are surrounded by magnificent risk departments, they have no reason to take a step back and try to see things through a more holistic lens.
One of the ways that I try to differentiate is to make sure that I can add value to a portfolio manager that might need it, in places where they might have blind spots. Every PM is different; they all have their own methodology and the way they approach things. I have been fortunate enough to have traded for a lot of different styles of portfolio management. If I can identify a stylistic tendency that often generates a blind spot, I can then try and fill that blind spot. Some will accept it, some may value it, and others could think it’s worthless. But I have found that going through the pattern recognition exercise, whether they find value or not, still gives me the opportunity to mention something that may help with their mosaic. They may not see the value that I do, but one has to try.
Q: As an outsourced trader, how do you view risk, both at the stock level and the portfolio level?
We try and help portfolio managers focus on the metrics we are familiar with. It’s not for us to opine on risks related to the fundamentals, that is the domain of portfolio managers and analysts. What we can try and bring to light is overextended names in the portfolio and or names we think demonstrate crowdedness.
When portfolio transparency is available from the client, we can rank the portfolio through a few different metrics. None of these metrics in and of themselves can offer the answer as to whether a name is overextended, but together they can help offer a view as if they may be.
We start by ranking the relative strength index of each name. It is not always the case but names with RSI’s over 70 or below 30 are often thought to be over extended. We also like to look at what the option market is telling us. If the implied volatility is substantially higher than the historic volatility, are we aware of why? Is there a forthcoming binary catalyst? If so, is the portfolio manager comfortable with the potential negative outcome? So, we rank the difference between the implied and historic volatilities of each name in order to try and spot any outliers. Finally, we monitor the alpha and beta contributions to overall performance. If a particular name has an unusually large contribution of alpha, could that mean that the market is overly confident in the name presently, and if expectations are not met is it susceptible to a reversion?
All 3 of these metrics can help us alert portfolio managers if each of them is leaning a certain way. A name with unusually high RSI, low implied vol and extreme alpha contribution headed into a quarterly earnings report should have a very good result. But, if the name were to miss it would be at risk, much more so than a name without the 3 metrics ranked as highly. On the flip side, and this is where we have found this exercise to be even more valuable, is when the set up is around consensus short names. If the RSI ranks very low, the performance contribution is highly driven by beta or nonexistent alpha, and implied vol is very low, it could become a recipe for an upside surprise. If in fact the name is a consensus short, it becomes a very dangerous candidate for a short squeeze.
Portfolio risk is something we can look at, but that is largely the domain of each individual portfolio manager. Given full transparency we will always monitor sector, geographical and factor risk, but it has been our experience that most PM’s are fully aware of these metrics from day one of their launch. As we mentioned from the beginning, we are simply trying to offer a view to our clients that they normally might not have in their focus.
Q: When you speak with a fund with a trading-focused portfolio manager, how might you engage?
A lot of younger portfolio managers and those with large platform experience are very informed in trading. They may have much shorter holding periods in mind, which makes any pertinent information related to their names even more impactful in the short term. A few ways we can try to help add value are: (1) keeping them abreast of all order flows that could impact their names either directly or indirectly. (2) offer anything that’s tertiary, anything that feels like it offers them an edge. (3) Once in a while, remind them that fundamentals can matter, especially when many are so focused on every little screen movement. For the most part, the trading-oriented PMs know what they want to do; all you can do is try and add as much color as possible.
Q: On the flip side, if a fund is looking for less noise on the trading front but more core competencies from you, how do you tailor the information you push through to them?
Tread lightly. One does not need to be an all-star when trading things for them, especially if a PM sends an order with instructions to trade it as you see fit. You need to slowly figure out what their time sensitivity is and how their vocabulary works. Traders and portfolio managers sometimes have different vocabularies, and it’s very important to start and be extra careful when you are first learning the tendencies of new portfolio managers. From there, we try and introduce different things to see what resonates at a slow pace. This is where the metric rankings and a few other things that we do for portfolio managers come into play. If any of it resonates, we will continue to do it. If it does not, we simply block and tackle the best we can.
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.