There is a wide gulf between institutional traders and retail traders in terms of technology, access to trading algorithms, trading techniques and investment vehicles. And as the unending battle between the “smart money” and the “dumb money” continues, a financial product which has been around for more than 20 years and is only just coming to the fore, is about to change the narrative.
Steve Wong (pictured), Head of Trading at DeskTrading, shares his views on the future of Separately Managed Accounts as an investment vehicle and a new global trend in investment management.
INTERVIEWER: What is SMA and who is it for?
The investment ecosystem basically has two categories of investors: the institutional investors and the retail investors. The key factor that has always separated these two categories of investors is the amount of money available to access an investment vehicle. The institutional investment vehicles traditionally have had large capital requirements and so by design, created a barrier of entry for retail investors.
Some attempts were made to fill that void by the emergence of some exotic but ultimately “dangerous” investment vehicles. But one vehicle which emerged within that period and has gradually started to gain traction was the Separately Managed Accounts (SMA) investment vehicle.
Initially, the SMA model was created as an institutional-style asset management scheme designed for retail high net-worth investors who had access to a large amount of capital. But the investment management universe has slightly changed since then and today SMA is shaking up the managed funds investment terrain.
The demand for SMAs is tremendously growing worldwide. And it is not only investment flows into this sector that has been on the rise. We are also seeing an increase in competition among providers of SMA investment portfolios causing the entry capital minimums fall across board. Today, the minimum capital for entry into SMAs, which used to be in the region of hundreds of thousands of dollars, has fallen tremendously to become available even to small-cap retail investors.
INTERVIEWER: What are the key benefits available to the SMA investor?
In a typical fund, investments are pooled from several sources, and the investment decisions tend to take a “one-size-fits-all” approach. Added to the potential issues that arise from such a generalized investment approach is the lack of control that an investor has over the decision-making processes. Whether or not you agree to it, you are bound to share in all capital gains tax liability, or are forced to partake of investments you may not necessarily agree with for moral or religious reasons. You have to take what you see or you simply get off the train.
The SMA has come to change all this by providing mass customization, greater ability to offset capital gains tax liabilities, reduced costs, and more control over investment decisions.
INTERVIEWER: What are Smart Portfolios offered by DeskTrading?
With advancing technology, SMA investments are also becoming more specialized. At DeskTrading, the individual investor virtually “composes” and owns the trading portfolio as opposed to simply owning a share of a manager-directed investment pool. This also means that there is now an opportunity to become more selective in the choice of assets used to compose the portfolio. For instance, an investor may choose to invest purely in a specific asset group (FX Eurozone, Indices, Metals, etc.) or by pooling assets from various asset classes. This is the SMA investment model that DeskTrading presently offers its clients via the XDesk Smart Portfolios technology.
Actually, for retail-classified investors, this is probably the next best time to open an SMA. This product has been around for more than a decade, and the performance of Smart Portfolios is proof that this is a product that actually works.
We are one of the pioneer players in the FX field of the SMA landscape - our precursor company was founded back in 2008. The passage of time has allowed us to fine tune our SMA offerings. The benefits and potential risks are better understood than ever, and XDesk provides the ability to create totally bespoke, hedge fund style trading portfolios. XDesk clients are not being fed with an investment product that they know little about, but rather the investment product that is created and built around the investor using institutional tools.
INTERVIEWER: What are the advantages of investing in an FX-based SMA?
Key advantages are:
Lower Barrier for Entry
Ability to own a diversified portfolio
Unrestricted access to an institutional-style portfolio management system
INTERVIEWER: What are leveraged portfolios?
Leveraged SMA portfolios are traded with margin (1:10 or higher), meaning an investor can only contribute a 1-10% stake of the total portfolio value to participate in the trade. Leverage allows placing trade orders worth $10 or more for every $1 of equity held in investors' accounts.
Moreover, XDesk SMAs allow investors to magnify their trading results, which is otherwise impossible, as with traditional SMAs. For example, a 0.1 percent increase in positions would yield a profit of 1-10 percent; in contrast, a traditional SMA would have gained only 0.1 percent.
INTERVIEWER: What is your prediction for SMA in the FX market?
SMA is an investment model which has come to stay, and will increasingly be deployed in many financial markets, including the FX market. It will definitely challenge existing PAMM and MAM systems, and create a viable alternative investment option for retail traders who want their investments managed the institutional way. Given that institutional trading firms have had far better success in the FX market, this should be an added incentive to go with an FX-focused Separately Managed Account.
INTERVIEWER: What are your views on the future of SMA in general?
The future of SMA is bright. We believe that mass customization in investing is a globally growing trend. There is a lot of room for growth, which will ultimately benefit the investor in terms of increased customization, reduced costs, lower entry barriers and improved portfolio performance.