With $20 billion in assets under management, AJO, a Philadelphia-based quant firm, looks for opportunities beyond the United States’ borders for its large pension fund, endowment and institutional investor clients. Although it’s not exactly an HFT shop, the firm relies on quants to trade, according to Douglas D. Dixon, principal and trader. He explains why AJO is eyeing emerging markets over the next year and why the firm, which turns to outside providers for technology, isn’t ready to store its tick data in the cloud just yet.
Describe the AJO hedge fund.
Dixon: We're value-tilted toward U.S. equities only. We're more of a traditional quant shop, rather than a trading quant shop. We use quantitative processes to build our portfolios. Our portfolios are mostly long-only, but we do have massive long/short positions. And though we currently are domestic-only, we are knee-deep in rolling out our first international product, so by early next year our whole story will change. But we will use the same quantitative approach.
As a quant shop, do you develop your own algos?
Dixon: We do use algorithms, but to be honest, that's not our bread and butter. We're not an HFT shop. We take the broader view that no one knows their algos better than the brokers who designed them, and the real challenge is when to use each algo. So we think our real value-add is to find those brokers who can use their arsenal of algos the best.
We typically give the brokers in our roster an equivalent slice of our trading for an extended period of time -- long enough so that we can make a statistically significant assessment of their execution quality. And then the ones who do a good job -- we push business to those brokers.
How do you rate your brokers?
Dixon: We have a complicated process. We not only look at dollar-weighted performance, we look at equal-weighted performance. We pull in outliers and then slice and dice the data everywhere we can think of to determine which brokers are outperforming the others. And we put the data in front of our trade management oversight committee to see if there are any back-office issues.
Are dark pools an important part of your business?
Dixon: They are a reasonably important part of our business. Obviously we want to take advantage of any liquidity we can find. We are big proponents of principal packaging and blind risk bids to the degree that we get compelling bids on that front -- that's where most of our business goes. We need to understand risk behavior, but when we do have to go to the agency front, it's reasonable that some of those names will be the least liquid ones.
Have you increased lately the number of trades that you execute in dark pools?
Dixon: We haven't had the need to do more in the dark recently. We are in the least-expensive environment that I have personally ever seen, which is great. Among the benefits is that we are getting aggressive bids from the counterparties.
How are you handling the crisis in Europe?
Dixon: Thankfully, we don't need to navigate it yet because we're not in that actual space. My biggest fear is that I'm going to be watching Saturday morning cartoons with my kids and I'm going to see a news break that they've broken up the whole system or expelled Greece or Ireland, and the next two months of my life will be a volatility whirlwind.
What are your biggest concerns about the market? The upcoming election? The poor job numbers?
Dixon: As a quant shop, we don't deal with those events at a macro level. Obviously we are paying attention and tweak the dials when the way our model thinks about the world no longer is the case. It was most evident during the meltdown, when the government would step in and do something that would change the whole playing field. There are no models that will pick that up ahead of time. Regardless of that, we chug along instead of thinking about who will be elected this year.
Phil Albinus is the former editor-in-chief of Advanced Trading. He has nearly two decades of journalism experience and has been covering financial technology and regulation for nine years. Before joining Advanced Trading, he served as editor of Waters, a monthly trade journal ... View Full Bio