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Concordia Advisors

2007 TOC

Basil Williams, Chief Executive Officer, Concordia Advisors (New York)

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Personal Background
Fund Background
Technology and Algos
Big Picture

Description of Firm:

Concordia was founded in 1993 and operates out of four offices: New York, London, Singapore and Bermuda. The firm runs a core global multistrategy product that seeks to achieve an absolute return in all market environments; the target return for that fund is 750 basis points over Libor. There are six key components to the multistrategy that also are offered to investors as individual funds -- an equity market-neutral strategy, a fixed-income arbitrage strategy, a distressed-debt and event-driven strategy, a credit relative value strategy, a volatility strategy, and a municipal bond arbitrage strategy.

Assets Under Management:

$2 billion.

Asset Mix:

Concordia trades in the global bond markets -- government bonds, corporate bonds, interest-rate swaps and rate futures. It also trades in the global equity markets, covering Europe, Asia and the U.S. In the credit markets, the firm trades both CDS and index-related derivatives. In the U.S., the firm also has exposure to the municipal bond market.

Structure of Trading Operations:

We have 110 people in the organization. Approximately half are investment professionals who are broken up into the six strategy teams mentioned earlier. We also have a number of traders who focus on transactions at the multistrategy level. Within each of the teams, we have portfolio managers, traders, and both quantitative and qualitative analysts who perform support functions for the traders and portfolio managers.

Trading Style:

Concordia is, in general, a market-neutral manager in that we attempt to hedge most of the macro exposures in our portfolio -- whether those be to the level of the equity markets, the level of the interest rate markets or the level of credit spreads. So we're looking for inefficiencies created within the market by investor flows, regulatory inconsistencies and investor preferences that lead to related assets having differences in underlying value. We expect those differences to revert over time, and we set up positions that profit as those differences revert.

INTERNATIONAL TRADING

Does the firm trade internationally?

In order to deal globally you have to, first and foremost, have a state-of-the-art risk management team and risk management system in place. Prior to our recent expansion 18 months ago into Singapore, we had really beefed up our risk management operations to make sure that we could operate in all the time zones on a 24/7 basis, and we really understand and manage our risks in a satisfactory manner. Historically Concordia has always operated in London and New York, so we've had quite a bit of experience dealing on a global basis, and we would consider ourselves to be one of the early global organizations.

As we've established a foothold in the Asian time zone, there are a lot of markets within Asia that are opening up for investment and are better accessed on the ground in the region. We've been trading in the Asian markets for more than a decade. And, in fact, in the mid-'90s a substantial amount of our risk was in Asia, so we're familiar with the landscape there. But markets such as India and mainland China are offering very interesting trading opportunities at the moment, yet are still in the very early stages of establishing a really strong capital market infrastructure that can be traded by both domestics and foreigners.

What are the challenges of trading globally?

Some challenges come from maintaining things that seem fairly trivial -- such as currency hedges and understanding the various regulatory environments and exchange protocols as you deal from one market to another. There obviously are cultural and communications challenges as you try to source ideas from a local marketplace and look at them in a global context.

And then there are less obvious challenges. The global markets, for example, don't all close at one time during the day. Therefore, as you mark your books, you have to understand the volatility of asynchronous marks -- you may have a quiet day in Asia that is met by an active day in the U.S. And you look at your trading P&L at the end of the day and it might seem to be out of kilter because the Asian markets didn't have a chance to catch up with the U.S. move, which then happens the next morning. So that requires more-detailed analysis on your P&L and P&L reporting and really understanding the true volatility of the positions you're trading.

TECHNOLOGY

Technology Environment

We spend a significant amount each year on technology infrastructure for the organization, as well as software development to assist our trading teams. Across the trading teams we use varying levels of technology, dependent upon how responsive the product mix that we're trading is to electronic trading. In the case of the equity markets, where the electronic trading platforms are very well developed -- and we've done a lot of proprietary development there -- we use electronic execution in a large percentage of our strategies. In the case of the distressed debt markets, there is very little in the way of electronic execution. And most of the execution is still done via voice brokerage with trading counterparties, so there is a limited amount of technology that's required for execution.

The other strategies fall somewhere in between -- for instance, in our convertible bond portfolio, which is part of our volatility arbitrage, we have an electronic delta-hedging engine. We're doing extensive work at the moment in the fixed-income arena to look at a variety of techniques that we can use for electronic execution -- both as sources of alpha and to free up some of the time that the portfolio managers and traders spend executing trades.

Buy vs. Build Strategy

We've purchased little from external providers in terms of algorithms that drive our trading. All of those algorithms have been developed internally, and the algorithms break up into two components. There are those that are meant to replace and improve upon human execution -- they free up time for the trading teams to focus on looking for new trading ideas and sources of alpha. And then there are areas within the firm where we are conducting research to see if we can use the technology to recognize different patterns in the markets and different behaviors in the marketplace that may only be recognizable on that scale, and may therefore produce some additional sources of alpha that can be extracted quantitatively that cannot even be assessed qualitatively. [Regarding order management and execution management], we think that we have engines that are better than the third-party-provided engines in the marketplace.

Use of Crossing Networks and Dark Pools

We have access to them, but to date they have not been a major source of liquidity for us.

ALGORITHMS & BROKERAGE SERVICES

Use of Algorithms

Algorithms are still very much in the developmental stages. But the first area in which we have implemented them is on the equities side, although we have recently begun to implement some fixed-income algorithms as well.

Prime and Executing Brokers

We deal with all the major global investment banks.

How do you determine which brokers receive your order flow?

We attempt to allocate order flow based upon the value the brokers are providing to us. In some cases it's research-driven, in some cases it's technology-driven, in some cases it's driven by being the low-cost provider. So it really varies from product to product. The more commoditized the type of trade and the execution, the more price is going to be the ultimate determinant. And the less commoditized the transaction, the more room there is for the value-added services on the part of the broker.

BIG PICTURE

Biggest trading opportunities for the firm?

I would liken the development of the Asian capital markets to where the European capital markets were 15 to 20 years ago. The major global investment banks are making a massive push in the region. They're setting up regional infrastructures and trading desks -- it's not that they haven't always been there, but they've been there in less committed fashion than recently. And that's really going to open up that region for further growth. I do think there also are some opportunities that are going to be created as the economic cycle turns away from the bullish state in which we've been operating. The development of the structured derivatives market and how it relates to credit is an area where there may be some opportunity as that type of structure goes through its first challenge, if we go into an environment of wider credit spreads. [Ed note: This interview took place in June 2007 prior to the credit crisis.]

Difference between trading for an alternative investment firm vs. trading for a traditional asset manager?

The skills sets in an organization like Concordia, in a more senior position, require a trader to understand the bottom-up aspects of what is in a portfolio -- everything including the quantitative and qualitative and fundamental analysis that's done on the portfolio, but more important, how those pieces interact when you put them in the context of a multistrategy fund. Most people in our business grow up selecting good trades. Less time tends to be spent on how do we structure all of those good trades into a proper portfolio that can withstand the stresses in the market and can assure their investors that they will achieve the target returns and target risk levels to which the portfolio is committed. It's more of a traditional portfolio management skill applied to what heretofore has been perceived as a trading-oriented business.

What is the most challenging aspect of your job?

To make sure that we continue to develop our investment processes in a manner that can, on a forward-looking basis, meet the expected returns that we try to deliver to our clientele. That requires a concurrent assessment of research within the space, market technicals within the space and the competitive landscape to assure us that we are, in fact, doing cutting-edge things that will enable us to extract alpha going forward.

We've had some material changes within Concordia in the past 12 months in reinvigorating and redesigning our investment process at the multistrategy level, and those changes have borne a lot of fruit for us recently. We're having very strong performance in both our global multistrategy and, more notably, in our Asian multistrategy over the past half-year. And we think that is the result of very intelligent risk-taking decisions that we've made and, overall, an improvement in the investment process that is built on years of strength and discipline in how we invest, and looking at those investments slightly differently in the context of the multistrategy portfolio.

Major Industry Trend

The industry had generally been having a good set of returns in recent years. Those returns have been buoyed, in general, by the positive equity markets and the continued state of low volatility. I think a more choppy equity market and a state of higher volatility may pose a little bit of a challenge to the industry in general. At Concordia, we've been positioning ourselves for a slightly higher volatility environment going forward and are continuing to look at ways of having a healthy transition from low volume to high volume, with positive results throughout that transition. With our strategies being nondirectional and beta-neutral, we're in a much better position to react in a more high-volatility environment to the set of opportunities that are presented than the diminished opportunity set that generally goes along with a low-volatility environment.

Interview Conducted by Randall Devere, Contributing Writer