Isaac Lieberman Discusses How His Aston Capital Management Hedge Fund Acts as a Supplier of Non-Bank Liquidity Provisioning

Video Transcript
Published on May 16, 2017
By Eurekahedge on Youtube

Alexander Mearns, CEO of Eurekahedge, Spoke with Mr. Isaac Lieberman, CEO and Founder of Aston Capital Management, a Quantitative Hedge Fund About Managing a Profitable Hedge Fund

Interviewer: Alexander
Interviewee: Isaac

00:03 Alexander: Hello, today we’re talking to Mr. Isaac
00:06 Lieberman, the CEO and founder of Aston
00:10 Capital Management; Aston Capital
00:12 Management is a New York-based
00:13 quantitative hedge fund specializing in
00:16 systematic macro trading strategies,
00:19 currently Aston Capital render
00:21 liquidity provisioning service, within
00:22 the global FX (Forex) markets, and Issac joins us
00:26 today to discuss what a non-bank
00:29 liquidity provider does, how they deploy
00:32 technology, and quantitative pricing
00:34 techniques in this market, and also how
00:37 new players like Aston are establishing
00:39 a presence in this space traditionally
00:41 occupied by the large international
00:44 financial institutions.

00:44 Alexander: Hi, good morning…
00:49 Isaac; thank you for joining us today.
00:51 Maybe you can start off by telling us a
00:54 little bit about your history prior to
00:56 founding Aston Capital.

00:56-01:00 Isaac: Prior to founding Aston,
01:00 capital,

01:01 I ran principal trading businesses in FX
01:04 and fixed income starting in 1996 at
01:07 Bear Sterns, where I was hired with the
01:09 mandate to build standalone principal
01:11 trading businesses using quantitative
01:13 techniques and technology; those
01:16 businesses grew along foreign
01:19 exchange and fixed income lines, across
01:20 multiple products including cash,
01:22 forwards, options, and swaps. And in 2008,
01:28 when JP Morgan took over Bear Stearns, I
01:30 remained with JP Morgan, running the same
01:32 business model along proprietary trading
01:35 and FX and fixed income;
01:35 Alexander: Okay. Thanks…And
01:38 can you tell us why you setup at Aston
01:39 capital?

01:39 Isaac: yeah, it seemed to me that with
01:43 regulation and tier 1 capital charges
01:46 and markets becoming open access and
01:48 with “traumafication” taking place that
01:50 it made a lot of sense to recreate the
01:53 business as a buy-side quantitative hedge
01:55 fund and be able to utilize agile
01:58 technology and establish a market
02:01 presence with investor capital, private
02:04 investor capital, supporting the business

02:06 lines…

02:06-02:09 Alexander: Are you a quantitative hedge fund
02:09 or, are you a non-bank liquidity
02:11 Provider?

02:11 Isaac: We look at ourselves as a
02:13 quantitative hedge fund and liquidity
02:15 provisioning being a business line, and
02:17 that we have investor capital in
02:20 terms of AUM and one of our businesses
02:23 is we provide liquidity in global
02:27 foreign exchange markets five and a half
02:29 days a week 24 hours a day in 31
02:31 currency pairs.

02:31 So, with that sense, we’re
02:34 able to produce solid returns for our
02:37 investor base;

02:37 Alexander: So, you’re using a strategy
02:40 that is a similar strategy to
02:42 what a bank would utilize?

02:42-02:45 Isaac: Our business model has been very similar to
02:47 a FICC (Fixed Income) trading business inside of a bank in
02:50 that you know we have a strong capital
02:52 base; we have agile technology and
02:54 quantitative research systems which
02:56 support liquidity provisioning and risk
02:58 trading strategies.

02:58 The returns of our…
03:00 business model are very similar to the
03:03 returns of a FICC trading business inside of a
03:04 bank. If you look at their quarterly
03:06 earnings, where they break out FICC
03:08 trading on that risk profile, that
03:11 trading profile, that return profile is
03:13 very similar to what Aston Capital is
03:16 producing and aiming to produce.

03:16 In our…
03:18 model, all the returns go directly to our
03:20 investors; our hedge fund investors.

03:23 Alexander: What’s change in the environment? What’s
03:25 changing the regulatory environment
03:26 that’s allowing you to do this? And, why
03:29 the banks are not doing this? Is it purely that
03:31 the cost of tier 1 capital for the banks
03:33 is why we are seeing an influx of
03:35 companies which are getting involved in
03:37 this space? And, will they be…
03:39 successful?

03:40 Isaac: Yeah! Well, tier 1 capital costs are a big
03:43 factor in terms of a banks appetite to
03:46 hold risk on their books; you also have
03:48 the Volcker Rule which limits banks
03:51 ability to take proprietary positional
03:53 risk; in addition to that, you have a
03:57 trend of open access and
03:58 electronification, which allows firms
04:01 against the capital to come on and
04:03 compete and complement banks in the
04:07 primary market with disclosed
04:10 trading relationships. As banks started to…

04:14 act, most agencies input
04:17 and algorithms start to take place in
04:19 terms of executing custom orders
04:21 directly into the market that sets the
04:23 stage for Aston Capital to be liquidity
04:26 provider to those algorithms clearly
04:28 provided to the agency order flow coming
04:31 in to and that’s being presented to us; and
04:34 it also allows us to trade principled
04:36 proprietary trading strategies…
04:39 which is big within our hedge fund
04:41 mandate.

04:41 Alexander: So, what are the main barriers to
04:43 entry for a company such as yourself
04:46 that wants to start up and get involved
04:48 in this space? And, can compete with the…
04:50 you know…with the big boys, such as
04:52 Deutsche Bank and the other larger
04:53 liquidity provider in the FX space?

04:53 Well,
04:56 liquidity provision is a capital
04:58 intensive business, both in in the AUM (Assets under management)
05:01 required to support the capital market
05:03 trading operations, as well as the
05:05 technology infrastructure, and talent
05:08 acquisition to support the quantitative
05:10 research and technology development. It’s
05:13 very important that a company that is in
05:16 the liquid provisioning build their
05:17 technology organically as well as their
05:20 research vehicles; so, the barriers to
05:22 entry are capital and trading capital in
05:27 operating capital.  Additionally, there’s a
05:29 lot of know-how…

05:30 There’s know how and how markets function;
05:32 how they work; how how the core
05:34 ecosystems operate; as well as
05:37 relationships, which is a very big part
05:39 of it. Obviously, we have strong
05:41 relationships with our trading partners
05:42 as well as our consumers of liquidity.

05:46 Alexander: Would it be fair to say that’s sort
05:47 of three things?
05:47 So, you’ve got capital,
05:49 market knowledge, and technology know-how?
05:54 that’s sort of three keys that we have
05:56 which has the capital. As an expertise in
05:58 all three, maybe you can give us some
06:00 ideas of how you use technology to sort
06:02 of maximize returns in the space,
06:04 minimize your risk of course.

06:04 Isaac: We have…
06:06 offices in Tel Aviv and in New York; in
06:09 Tel Aviv is where we build and operate
06:11 all our technology and quantitative
06:13 research; one of the important things to
06:16 understand with technology is how you’re
06:18 going to aggregate a fragmented market,
06:20 how we’re going to find you know,
06:23 the liquidity, risk transfer pricing, being
06:26 able to distribute the liquidity, being
06:27 able to process it and trade. The
06:29 performance metrics are very, very high.

06:31 The people who you’re trading with, the
06:34 consumers of liquidity.
06:35 I’m used to dealing with best-in-class
06:37 liquidity providers. So, for us to
06:40 establish market share and have a market
06:43 presence, I get loyalty from our customer
06:45 base, our clients. We have to have the
06:47 highest standards of performance. So,
06:49 because we build all technology in-house
06:52 we’re able to constantly optimize and
06:54 innovate our technology delivery and
06:57 strategy, and that’s what allows us to
06:59 have our success that we’ve enjoyed so
07:01 far.

07:01 Alexander: When you’re providing as a sort of
07:04 liquidity provider in the FX space,

07:07 what happens in an extreme
07:09 extremely volatile event such as a sort
07:12 of 2008 global financial crisis? How does
07:15 that affect your business?

07:15 Isaac: Our models…
07:18 are designed to trade through all
07:19 periods of volatility, high extreme volatility
07:21 as well as low volatility, but in
07:24 2008-2009 financial crisis,
07:28 we made a point of having continuous
07:29 liquidity to all market conditions.

07:31 Obviously spreads widen and then
07:34 contract and then widen again, and we
07:36 keep our prices relevant to our
07:37 competitors and our peers, and we know
07:40 that by our hit ratios, the amount of
07:42 volumes that we trade, obviously, the
07:44 profitability goes up very well too, and
07:47 we return great returns for our investors,
07:48 when high volatility was completely
07:51 uncorrelated with you know, inverse
07:53 correlation to equities; in that during
07:56 periods of high volatility, we outperform
07:59 and that shows up in our track
08:01 record.

08:01 Alexander: Essentially, high volatile events
08:04 like a financial crisis is not really a
08:06 risk to you then what are?
08:06 Isaac: Well, the…
08:10 largest risk to a business like ours is
08:12 that it requires a very large
08:14 operational infrastructure in order to
08:16 operate on, you know, along
08:19 technology, along connectivity, along the
08:22 debt market data feeds,
08:25 quantitative research; so, there’s a lot
08:28 of fixed costs that go into running a
08:30 liquidity provisioning business.

08:32 Should you go into a period of extremely low
08:34 volatility, which is where volumes become
08:38 subdued and the ability to reprice and
08:40 reprice and price and trade becomes
08:43 more limited, what happens is the returns
08:45 go down; they don’t necessarily
08:48 necessarily collapse, but they tend to
08:50 get muted, but the operational
08:53 cost of the business stays constant; so,
08:56 obviously, we try to budget
08:58 in the volatile times when we’re
09:03 earning more for the anticipation of
09:05 lower volatile periods.So, we could have a
09:07 consistent operating business model.

09:10 Alexander: And, I guess it certainly helps having a big
09:12 bulk of your workforce based in Tel-Aviv
09:14 which is a slightly more different cost
09:17 debt proposition to New York-based tech
09:20 guys.

09:20 Isaac: Yeah, you know, the Tel Aviv
09:22 workforce, we found them; you know, the
09:24 competitive pressures that you have in
09:26 New York and London are not there. A lot
09:28 of the competitive pressures in New York
09:30 and London for tech and quant talent are
09:32 actually coming from compliance these
09:33 days, and more operational infrastructure
09:36 than core front office trading; so, we
09:39 bring front office trading to Tel Aviv
09:41 give the folks there an opportunity to
09:44 engage in careers similar to what they
09:48 would find in New York and London; for
09:50 that, they’re very opportunistic and they
09:52 work very well and a lot of them have
09:54 very strong training coming out of the
09:55 elite military units in the intelligence
09:58 and cyber units of the IDF and that
10:00 serves as a training ground which helps
10:02 us very much in financial engineering.

10:05 Alexander: So, from a customer’s perspective, why would
10:08 they use a country such as Aston as
10:10 opposed to a normal financial institution?

10:12 Isaac: Right. Well, in today’s world is of an
10:15 emphasis on best execution, total cost
10:17 analysis, and with MIFI too coming
10:20 just around the corner.

10:21 This is becoming ever more important; so,
10:24 a customer’s fiduciary responsibility is
10:27 to have as many pricing sources as
10:30 possible and unique pricing to be able
10:33 to demonstrate that they got the best
10:34 possible execution,
10:36 which also will help their returns and
10:38 the fiduciary responsibility to provide
10:42 best execution to investors and
10:45 customers;

10:45 So, when you add a non-bank
10:49 liquidity provider like Aston capital
10:51 into your aggregator, you’re getting a
10:53 unique additional source of pricing and
10:55 risk transfer that wouldn’t be available
10:58 if you just use the traditional set of
11:01 institutions that you normally trade
11:03 with, and that’s where we are value-added
11:05 to everybody’s trading business.

11:05-11:08: Alexander: Thank…
11:08 you Isaac; so, could you just tell me what
11:09 your vision is for the future of your
11:11 business; are you planning to expand
11:13 outside of FX. Aston Capital’s goal:
11:16 Today, we provide liquidity in two
11:19 day settlements, part foreign exchange.

11:20 The goal of the firm is to register as a
11:23 swaps dealer in the US and go vertical
11:26 with an FX and offer liquidity
11:28 provisioning in forwards, in options, NDFs
11:30 and swaps.  After we complete the
11:34 build-out in global foreign exchange,
11:36 we’re going to aggressively move into
11:39 fixed income markets, where we intend to
11:41 be a liquidity provider and build a
11:42 market presence in government bonds,
11:44 corporate bonds, inflation products,
11:47 structured products, swaps and options.

11:50 From there, we’ll continue to build out
11:52 additional product lines within the fixed
11:54 income markets.

11:56 Alexander: What type of investor does this strategy appeal to?
11:59 who are you having conversations with, and
12:01 which ones are sharing an interest.

12:05 Isaac: Our strategy fits into systematic
12:07 macro; with systematic, we take a
12:10 very macro approach in the way that we
12:12 engage capital markets, and what we’re
12:15 finding is that as large institutional
12:18 investors and that could be fund to
12:22 funds or it could be primary endowments
12:25 or family offices, or even private equity
12:28 firms, look at our business model and
12:30 they see the consistency of the run rate
12:32 and the yield which is a return on
12:35 equity to them; they start to see that
12:37 this investing in asset capital as a
12:39 hedge fund would be very similar to

12:42 Investing directly in a trading business, in a
12:44 large financial institution, as opposed
12:47 to buying the stocks; imagine if you could get
12:48 the returns of the trading desk directed
12:50 to you as yield on your investment;
12:52 so, as the model is getting
12:55 better understood, we think that and
12:58 believe that a lot of financial
13:01 institutions, whether they be private
13:03 equity firms, fund to funds, endowments,
13:06 private offices, high net worth
13:09 individuals, will want to invest in our
13:12 business; and additionally, we know that
13:14 they have done research where they have
13:16 taken our daily returns and overlay them
13:19 on the global portfolio of equities and
13:22 credit and saw this as a great hedge for
13:24 volatility because our business model
13:27 obviously as a liquidity provider,
13:28 outperforms when a lot of those markets
13:31 are under considerable stress.

13:31-13:35 Alexander: I think that was a super interfere and you’re
13:36 really enlightening on your strategy. I
13:39 personally find it very interesting, and
13:40 I wish you all the best.

13:42 Isaac: Thank you very much; it was a pleasure
13:44 talking to you today.

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