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Concordia Advisors

2007 TOC

Jean-Pierre Aguilar, Chief Executive Officer, Capital Fund Management (Paris)

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Personal Background
Fund Background
Technology and Algos
Big Picture

Description of Firm:

Capital Fund Management (CFM) was incorporated in 1991, which makes the firm one of the oldest players in the field of alternative investment management in Europe.

Assets Under Management:

Approximately $4 billion.

Trading Volume:

In futures, more than 100,000 contracts per day; in stocks, more than $500 million per day face value; in options, more than 25,000 contracts per day.

Trading Style:

It's pretty much 100 percent quantitative and systematic, which doesn't mean there's no human intervention. Basically, when we add a new system to production, it's a discretionary decision, and we decide to do so because we've been able to create through our research department a system that is different from what we have already. And it's been validated and proven through the testing process here. And on the other end, we might decide to partially deleverage a current system because it shows some attrition signs - that's a discretionary decision. So the trade itself is pretty automated, but the evolution of the trading system is purely discretionary.

Products Offered:

We offer three core strategies. One is a managed futures quantitative global macro strategy, in which we manage close to $1.99 billion. In this strategy, we trade futures, FX and U.S. Treasuries. We also launched, in 2001, an equities statistical arbitrage program, trading stocks globally - U.S., U.K., Europe, Japan - in which we manage close to $1.4 billion. And we launched at the beginning of 2005 a volatility arbitrage program - which trades U.S. stock options and U.S. stock index options - in which we manage close to $460 million. In addition, we've set up a multistrategy program that invests in the three core strategies, called Stratus. We are managing about $2.2 billion in this program, but those funds already have been counted in the three core strategies. The only program currently available for investment, and the only way to invest in our funds, is through Stratus.

Structure of Trading Operations:

Currently, we have about 70 people in the firm. We are headquartered in Paris with an operation in New York (for marketing and production, primarily). We have about 27 Ph.D.s in the firm doing research full time and about 25 IT engineers doing all the development required for the implementation of our strategies. So out of 70 people, we have close to 50 in R&D.

INTERNATIONAL TRADING

Does the firm trade internationally?

We are active anywhere we can find liquidity and electronic connectivity.

What are the challenges of trading globally?

Due to our pretty high-frequency nature, we need to control our execution costs. So we need electronic connectivity to be able to implement our trading strategies and to have this cost control. As soon as a market has enough liquidity and electronic connectivity, we are looking to connect to it.

TECHNOLOGY

Technology Environment

Latency is a key point here, and also reliance and redundancy - to be able to operate without any breach or failure. So technology is very important to us, and we're investing a lot of resources to build a very efficient technology environment. We use multiple data centers located close to the exchanges - in the U.S., Europe and, very soon, Asia. We have redundant solutions - remote servers, multiple market access. And, for the basic components, we buy technology externally - such as databases, feedhandlers and middleware. But for the rest, we develop it ourselves because we want to have very dedicated and specific software in order to handle our operations.

Buy vs. Build Strategy

If we were able to find solutions ready to be implemented and in line with our requirements, we would buy them because, in that case, you always can leverage another company's development forces. But the fact is it's very difficult to find a piece of software that perfectly matches our requirements. So what we do is buy basic building blocks - such as database management systems, feedhandlers and middleware - and everything else is developed internally. Order-routing systems, risk-control systems and risk-analysis reporting all are examples of things we've built internally.

Who ultimately is responsible for the firm's technology?

The COO, Jacques Sauliere, and myself.

Use of Crossing Networks and Dark Pools

We use them. We are trying to see if we can find some value there. If we can improve our execution by using dark liquidity, we will use it.

ALGORITHMS & BROKERAGE SERVICES

Use of Algorithms

Obviously, this is a very proprietary domain. I would say that we are using statistical and quantitative approaches, but I can't offer more detail than that. But I can say that we develop our algorithms 100 percent internally.

Prime and Executing Brokers

For equities, we are primarily using Lehman Brothers, and we are pleased with the service. For futures, we're using UBS to clear and for execution we are using Goldman, Lehman and ABN AMRO. For FX clearing, we are using Barclays. For FX, we are using Barclays and ABN.

How do you determine which brokers receive your order flow?

We ask for very competitive pricing due to our volume and our regularity - we trade every day with considerable volume, so we are a good customer from this point of view. But we also need good service - just being connected to a market is pretty simple, but what if we have a failure somewhere? To know the status of orders and resume our trading, etc., we need a good partner. So we're very demanding in terms of service and in terms of the supporting team and the process in place as well as the resilience of the operation and the level of availability provided by the brokers.

BIG PICTURE

Biggest trading opportunities for the firm?

The fact that we've been able to develop a real know-how in terms of electronic connectivity and high-frequency trading - we started doing research into this area about seven or eight years ago, and now it's applicable to other markets that are becoming electronic.

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

We have no traders at the firm - we just have people doing research and IT. But those researchers and IT people have been working in the markets for seven, eight, nine, 10 years, and some of my partners have been with me for 13 years; therefore, they have a very good market expertise. But there are no trading skills, such as filling of the markets; we have, instead, filling of our systems. So the skill needed for our people is to be creative with a point of view.

What is the most challenging aspect of your job?

It's people management. To be able to look after a wide range of opportunities, one needs a lot of people to create value - you increase the likelihood of finding more ideas just by having more brains thinking about the same problem. But when you're running a firm with a lot of people, you face management issues. So my challenge is managing people, and having a very interesting and cool and profitable working environment. If I'm able to manage a large team of very skilled people, then we will be successful in the market.

What new technology would solve your biggest trading problems?

The game is always information. We would just like to extract information from what we have. We are sampling between 100 gigabytes and 200 gigabytes of data every day. I would like to have some information about the data because it's often a blind sampling.

Major Industry Trend

It's competition. The competition is very smart, and more and more money is flowing into the quantitative strategies. It's funny - it's never been easy to make money in the markets, and the entry barrier is higher than before, so I would not be able to set up a business [today] like I did 16 years ago. I was using one computer, one phone, one modem, and it was enough to create value there. Nowadays, there's no way I could do that - I would need a lot more research and technology. But at the same time, if you gain enough knowledge, there's a lot of opportunity, and more and more we are frustrated that we are not bigger in terms of the research team, because we have so many ideas we'd like to go through - and we will go through. But it's a question of time to market. It's a race, and the race is getting faster and faster. But provided you have the right resources, it seems that there will be a future to this business.

Interview Conducted by Randall Devere, Contributing Writer