How to turn your FX brokerage into a comprehensive hedge fund – FinanceFeeds Research

What do you need for your broker to be able to attract FX hedge funds? How do you set it up, and can it be done via turnkey solutions? Who is doing it? Here is all of the information

Over recent weeks, it has been patently obvious that a very large rush toward developing wealth management platforms has been a priority for well funded financial services companies and startups alike, from every sector ranging from Tier 1 bank executives to institutional and wholesale infrastructure providers.

Just a few weeks ago, Mark Le Lievre, Co-Founder and CEO, who was previously global Head of Products and Platforms at J.P. Morgan Private Bank and Head of Investment Content at UBS Wealth Management raised $4 million to start a wealth management platform along with his colleagues, all of whom had been senior executives at JP Morgan and Barclays.

This is just one of many examples of recent well funded attempts to break into the electronic wealth management sector by very experienced executives going it alone by breaking away from their corporate belt-and-braces background that formed their expertise.

Other examples have included institutional software company SS&C EZE, a long-established company that has been amplifying its services aimed at the electronic trading and wealth management sector for some years now. Just a month ago, the firm launched a full end to end solution for hedge funds, portfolio managers and family offices.

Within the existing retail electronic financial services sector, companies such as Hargreaves Lansdown, the UK’s largest retail financial services company which is worth around £6 billion, has offered electronic wealth management services via its all-encompassing Vantage proprietary platform from which clients can manage all of their investments from ISAs and pensions to their CFD trading portfolio from HL Markets, Hargreaves Lansdown’s white label partnership with IG Group, and managed funds.

Hargreaves Lansdown has a vast client base, all of which is loyal and based in the United Kingdom, making it a very sustainable business compared to many of the off-the-shelf platform orientated island-based FX firms which have been challenged for many years with the conundrum of offering diversified product ranges to clients in order to stop the $200 deposit one-time-only clients in far flung regions which cost over $1500 to onboard and perhaps should not be trading in the first place.

Wealth management platform development would appear the natural progression for most well established retail FX firms. They have the expertise, they know the industry inside out and have the mettle and ability to adapt quickly to changes in regulation, technology and demand.

This sudden yet extremely energetic direction is recent, and should be taken note of, as should another important means of gaining a higher quality caliber of clients and increasing commercial sustainability of the electronic brokerage model, that being entry into the hedge fund sector.

There are a few companies within the FX industry already doing this, but keeping it very quiet as it is a lucrative sector and the amount of revenues being made are substantial, without the need for much support or customer facing teams, and without the need for telesales or lead generating futility.

FinanceFeeds has made a substantial point of emphasizing the need to ebb away from the retail FX brokerage model which involves taking an off the shelf affiliate marketing type platform and simply buying leads. This is not the model of a bona fide electronic financial markets operator – for example you do not see IntercontinentalExchange or CME Group in Chicago doing that. They have longstanding exchange members who trade multi-asset product ranges on listed derivatives exchanges for years, at huge volumes, using specialist platforms which are designed for each type of trading environment.

Recently, MetaQuotes began to unveil some advertisements for its product designed to attract hedge funds. FinanceFeeds has garnered opinion from within the institutional FX sector, and the general consensus is that the company, despite its dominance within the spot FX brokerage sector, has experienced so much churn and burn from low-end retail clients as well as small brokers and white labels which are here today, gone tomorrow, that the company has had to come up with a more sustainable methodology.

The reality is, however, that hedge fund operators will eschew the MetaQuotes route.

MetaTrader is the preserve of the affiliate marketing-based small brokerages that want to be up and running immediately, buy leads that have been recycled around all other brands, perhaps have owned other entities such as casinos, or other white label brands that use similar products and wish to regenerate income via a different brand name, or have come from the gaming or affiliate sector.

Every hedge fund operator knows this, just as well as they know that their client base would become the property of MetaQuotes, as it would have to be hosted on their servers. Quite simply, the spot FX model used by many firms currently is not the right model for upscaling their business toward a higher quality client base.

The expertise is there. FX brokerages across the world are operated by some of the most astute and innovative people in the entire financial services sector, and their understanding of the combination of market integration or market making, client marketing, electronic risk management and customer service is absolutely first rate, as is the ability to adapt quickly.

Therefore, being saddled with a closed environment that doesn’t allow for additional asset classes – and if it does, it is via revenue sharing affiliate agreements with affiliate partners – and having no flexibility of product ranges whilst all customers are hosted on a third party server meaning that a hedge fund client base cannot be held by its fund provider, is not a proposition.

To elevate, FX firms need to go down the route of maintaining cost effectiveness, keeping their existing client bases content by extending what is available to them, and upping their image and their remit by emulating electronic hedge funds.

Professionals who have debated this recently include Andrew Gillibrand, a former Credit Suisse quant who is now CIO at UNION. He was an asset manager, having found that the timeline between engagement to commitment taking a long time. Mr Gillibrand had relationships in South Africa, Japan, Europe and realized that if the distribution issue exists for him, it exists for many, hence the foundation of UNION, Juan Colon of Machine Markets, formerly of Darwinex, which democratized access to capital and now has 60 million euros AUM, and is now making this technology available to managers, and lastly Ronald Richter, Managing Director of Bride Valley Partners, a capital introduction business and third party marketer helping asset managers in the alternative asset space to find investors, and has been active in hedge funds for 24 years.

Beginning the discussion on a recent panel participated in by FinanceFeeds at the Advanced Markets Hedge Fund Expo 2020, Ms Pittas asked the audience what their biggest worry is when launching a fund, 45% responded that lack of personal network to raise funds.

Following on, Mr Richter began to explain “I think the costs and engagement into a 50000 venture with limited budget in this particular environment which is very difficult for capital raising, you definitely need around a 2 to 3 year runway and have the cash for the working capital to at least have a chance to attract people as investors, because of course AUM is an important factor, the live track record is also important so it is not in the capacity of everyone to put that money down, especially if you have other costs such as mortgage, family commitments and life expenses. The question is how do you get out there to build that track record?”

“There are some options, such as going onto a platform, or if you are happy to sacrifice your independence for a few years, you could try to get hired by the big names, and make your track record that way, or you could go to a first loss provider which may not be the best choice for investors but you could always prove your track record that way” said Mr Richter.

“There are providers out there who will provide you with an umbrella and operational structure and regulatory facility to operate your strategy in a nice way. I will say there is a flurry of service providers out there, you should perhaps pay a bit more for the good quality service providers, which sounds obvious but if you add a layer of due diligence to your offering by adding a few service providers, make sure they are good quality. Investors today like to tick boxes and eliminate you for no reason, so be careful who to choose” he said.

FinanceFeeds debated this today with Roman Nalivayko, CEO of TraderEvolution Global, an enterprise software company which provides customizable multi-asset platforms to FX brokers, hedge funds and asset managers.

Mr Nalivayko explained “We at TraderEvolution see our solution as the most universal trading and investing platform for brokers that allows to target quite wide audience starting from retail projects that focused on the mobile apps to more professional money management and day trading. Our remit is to continue our ability to serve institutional clients via advanced desktop app or FIX API, this being a concept which gets proved with the each new implementation we do for our clients cross oever the world.”

This viewpoint goes hand in hand with the movement toward turnkey solutions being made available for FX brokerages to be able to onboard hedge funds.

It used to be possible to get tickets between $5 and $15 million easily, but now there are firms that will take a stake in your business and we are looking at tickets of around $50 million. Further down the scale we have family offices which range between $5 and $20 million, and there it is more a question of relationship. They like what a broker does, and they don’t have the same incentive as the big institutions. Brokers now need to focus on the investors they want. This would then refine a bit what brokers can expect to raise at the beginning when beginning to attract funds.

It is the way forward, folks.

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