Alpha Capture Reports

Five notable reports have been published in the US and UK documenting the value of trade ideas and alpha capture systems for money managers and institutional brokerage firms.

In September 2006, the UK’s Financial Services Authority (FSA) published a commentary, “Alpha Capture Systems,” in its newsletter on market conduct and transaction reporting issues.[i] The industry saw this as tantamount to an endorsement. [ii] The commentary noted the emerging trend by institutional brokerage firms to communicate ideas to their clients through such systems. It listed the core benefits as being a systematic way to (1) quantify and monitor the performance of different ideas, (2) decide which ideas to take forward, and (3) how to allocate commission. The FSA also described examples of good practices observed during visits to firms using alpha capture systems.

In September 2009, YouDevise published data on the performance of ideas transmitted through its commercially available alpha capture platform, TIM (Trade Ideas Monitor). [iii] During the preceding 24 months, 75% of contributors at brokerage firms in the UK outperformed relevant indexes on their ideas, with more than 50% of them generating alpha of 10% or more. Similar results were found for contributors at North American and Asian-Pacific brokerages over the preceding 12 months, when significantly more firms in those regions started using TIM. The data was based on the performance of all of their ideas, both long and short, from the time the ideas were “opened,” to the time they were “closed.”

Also in September 2009, GLG Partners LP of London, one of the world’s largest alternative asset managers, published data on the performance of trade ideas it had received 2005-2009 from research salespeople at European brokerage firms. [iv] GLG found that “a simple strategy based on broker ideas would comfortably be in the top quartile of UK pan-European mutual funds” for each year. Assuming commissions of 5 bps each way, trading at the closing prices on the day of idea receipt, and using all ideas received, returns ranged from 280 to 640 basis points annually in excess of benchmark indexes. GLG explained experienced research salespeople know how “to select the best ideas from their firm and put them in touch with the appropriate fund managers or analysts at clients.”

In March 2011, The Journal of Investing published an article, “Capturing Alpha in the Alpha Capture System: Do Trade Ideas Generate Alpha?” by Jean W. Thomas, President and CEO of Quantitative Research Group (QRG). [v] Using data from First Coverage (a commercially available alpha capture platform that merged in mid-2011 into TIM Ideas), he found that for the 18 months ended December 2008 – when the markets fell – ideas on stocks included in the Russell 1000 exceeded the index by 1209 bps and those included in the Russell 2000 by 1461 bps. For the 12 months ended December 2009 – when the markets rebounded -- he found that ideas on Russell 1000 stocks exceeded the index by 2004 bps and on Russell 2000 stocks by 7919 bps. He concluded that (1) trade idea data “could serve as a new source of alpha” for a range of strategies and (2) commercial alpha capture platforms “should serve as a catalyst that expands the use of this new source of alpha well beyond the province of large hedge and institutional managers.”

In May 2011, TABB Group, a financial markets research and strategic advisory firm, published a report, “Alpha Capture: The What, Who, and How Much”. [vi] TABB found that “electronic alpha capture is at its early stages and there is still tremendous growth opportunity, even in Europe, where electronic alpha capture is more mature than it is in the US or Asia.” TABB estimated that trade idea commissions currently total $350-$500 million annually and are projected to grow 20-30% a year for the next several years, more than doubling their market share of commissions, to 10% in 2012 from 4% in 2010. TABB identified five core buy side benefits of using trade ideas and alpha capture systems: (1) eliminates “the noise” and clearly identifies ideas for fundamental money managers, (2) measures market sentiment as an input into quantitative trading strategies, (3) monitors the performance of ideas for commission allocation; (4) ranks idea generators in order to improve the performance of ideas received for fundamental or quantitative trading strategies; and (5) creates an audit trail of idea communications. TABB also identified three core sell side benefits: (1) monitors the performance of the idea team, (2) sharpens the team’s ability to generate alpha and service clients, and (3) proves the firm’s worth to clients in order to earn increased broker vote commission allocations. TABB concluded that “at a basic level, electronic alpha capture could become a major workflow tool for every portfolio manager and broker dearer.”

On a quarterly basis, YouDevise publishes usage statistics on the TIM platform. For the quarter ended June 30, 2011, TIM had 1,004 client firms (up 55% from a year ago), consisting of approximately 250 buy side and 750 sell side firms. The historical database contained performance records on two million stock trading recommendations, up approximately 100% from a year ago, making it the largest such database for analyzing sell side idea performance and developing quantitative trading models that incorporate trade ideas.

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[i] No. 17. Financial Services Authority, 17 Sept. 2006. Web. 16 June 2011. <http://www.fsa.gov.uk/pubs/newsletters/mw_newsletter17.pdf>.

[ii

] Thomas, Jean W. "Capturing Alpha in the Alpha Capture System: Do Trade Ideas Generate Alpha?" The Journal of Investing, Spring 2011 (2011): 11-18. Print.

[iii ]"Institutional Brokers Using the Trade Idea Monitor Outperform Relative Indexes." You Devise Ltd 16 Sept. 2009. Web. 16 June 2011. <http://www.reuters.com/article/2009/09/16/idUS140984+16-Sep-2009+BW20090916>.

[iv

] GLG Partners LP, 1 Sept. 2009. Web. 16 June 2011. <https://www.glgpartners.com/glg_views/list>.

[v]Thomas

, Jean W. "Capturing Alpha in the Alpha Capture System: Do Trade Ideas Generate Alpha?" The Journal of Investing, Spring 2011: 11-18. Print.

[vi] Sussman, Adam, Kerry Massaro. Alpha Capture: The What, Who, and How Much. TABB Group. 18 May 2011. Print.