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DE Shaw shuns high-speed trading label, bets on Japan
November 29, 2012 / 11:32 PM / 5 years ago

DE Shaw shuns high-speed trading label, bets on Japan

NEW YORK (Reuters) - DE Shaw & Co, a once publicity-shy hedge fund known for quantitative modeling and immense computing power to drive strategies, does not see itself as a “high-frequency” trading firm.

Darcy Bradbury, Head of External Affairs at D.E. Shaw & Co, appears at the Reuters Global Investment Outlook Summit in New York, November 29, 2012. REUTERS/Carlo Allegri

The New York-based hedge fund, on a recent roll after stumbling with many others during the depths of the financial crisis, is moving to shed some of the secrecy that has long surrounded the firm founded in 1988 by David E. Shaw.

And these days the firm is intent on making clear to investors and the public just what it does and what it does not do with all its computer-driven programs.

High-frequency trading, a term without a clear definition but that involves “low-latency” or high-speed strategies, does not encapsulate DE Shaw, two of the firm’s managing directors said at the Reuters Global Investment Outlook 2013 Summit in New York.

HFT, in part because of the May 2010 flash crash, has become a lightning rod for criticism among a number of investors.

“I don’t think we view ourselves as high-frequency traders. No one can define what high-frequency trading is, obviously. If it’s using computers to trade stocks, we’ve been doing that for 25 years,” said Darcy Bradbury.

Max Stone, who sits on DE Shaw’s five-person executive committee, said high-frequency trading fails to provide the deep liquidity a market ultimately needs. But he added: “In general, I don’t view (high-frequency trading) as a malevolent force.”

Less than half of the firm’s assets are managed under computer-driven models with short time horizons, Bradbury said. The remainder of the funds is managed using strategies that may take months to bear fruition.

Max Stone, Managing Director at D.E. Shaw & Co, attends the Reuters Global Investment Outlook Summit in New York, November 29, 2012. REUTERS/Carlo Allegri

While the profile of the company started by Shaw, a computer scientist, has changed from its early success in statistical arbitrage, finding anomalies in trading patterns or distortions in the market are still key traits.

Assets under management stood at $27 billion as of October 1, according to the firm’s Web site. A year earlier on September 1, DE Shaw oversaw about $21 billion in investment capital, an indication the firm has taken in new money and generated strong returns in 2012.

A big bet in the firm’s macro strategy is the enormous pile of savings in Japan that earns little interest, said Stone.

Markets in Japan are so distorted that yields on corporate bonds are trading about 150 basis points less than credit default swaps on the same company, Stone told the summit.

Stone didn’t say exactly how DE Shaw is playing his Japan strategy, but he said shorting the yen and Japanese government bonds while going long on Japanese equities would make sense.

“I believe that some form of this will be a trade that makes money. Whether it makes money in 2013, I think is open to question,” Stone said.

Stone did not say what catalyst would trigger success in his trade, but he said the amount of savings in Japan has stopped growing. Other investors have suggested that the government may need to seek funding abroad when it can no longer fund itself at home, which could force rates higher in the country.

Neither of the two directors would discuss specific performance numbers, but Bradbury said the firm has had “a really good year. We’re having very good performance”.

(For other news from Reuters Global Investment Outlook Summit, click here)

Reporting by Herbert Lash; editing by Andrew Hay

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