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Best Execution for Hedge Funds

Traders Magazine, November 2004

Ben Mattlin

Every trader wants best execution. But for each hedge fund, it can often mean something radically different. "For hedge funds, minimal transaction cost doesn't necessarily mean optimal transaction cost," according to Robert Shapiro, former head trader at the $10 billion Iridian Asset Management, which includes $1 billion in hedge fund assets. At the same time as funds are watching best execution, they also need access to resources, such as sellside research, he says. That helps generate the all-important alpha. "Tack on an incremental commission charge," Shapiro advises hedge funds, to "pay for the alpha input drivers." Unsurprisingly, many pros stress various reasons why best execution - at hedge funds and long-only funds - isn't simply about best price. "Suppose there are three people offering the same low price," says one industry professional. "You need to know which one has the most liquidity." Finding hidden pools of liquidity involves "a process of watching the tape, picking up telltale signs, and probing with what's called an immediate or cancel order," he explains.

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