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September 2, 2013

Multi-Asset Masters

How Mellon Capital's Lynn Challenger effectively manages a desk trading stocks, bonds, currencies and derivatives

By Mary Schroeder

For Lynn Challenger, the last seven years have been one big project: transforming a far-flung order processing operation into a centralized, multi-asset trading hub where the traders take responsibility for each and every order.


Mellon Capital Management's managing director of global trading oversees nine traders trading equities, futures, currencies, fixed income securities and swaps from the quantitative money manager's base in San Francisco. All told, group turnover is about $1.2 trillion annually.

Before joining the storied money manager in 2006, Challenger spent 16 years on the sellside, mostly as an options trader. While he says his broker-dealer background was not a factor in his hiring, he does expect his group to think and act like sellside traders.

"I strive to bring the sellside mentality to the buyside," Challenger told Traders Magazine. "The way technology has moved, it's really empowering the buyside to make their own trading decisions and choices and manage their own risk. They're not just order processors that rely on sales traders to manage their orders. What we've been building on for the last six years is a true trading desk."

Mellon Capital Management is one of 16 subsidiaries of $1.4 trillion asset manager BNY Mellon that includes such well-regarded money managers as Boston Company, Standish Mellon and Dreyfus Corp. It manages $327 billion of its own, mostly in indexed equity funds. In that game, Mellon is ranked among the Top 5 passive U.S. index managers, a list that includes BlackRock, State Street, Northern Trust, and Vanguard Group, according to Pensions & Investments newspaper.

The firm was co-founded in 1983 by now-chairman emeritus Bill Fouse, widely recognized as the "Father of Indexing" and the creator of the first index fund. That was in 1971, for Samsonite Corp.'s pension fund. With that move, Fouse introduced quantitative investing to the pension fund world, although it would be many more years before passive indexing became accepted. The practice has since exploded, with assets in U.S. index mutual funds and exchange-traded funds accounting for 34 percent of equity and 18 percent of fixed income funds as of year end 2012, according to Morningstar. At $252 billion, more than three quarters of MCM's assets under management are in indexed equities. The investment category became enormously popular in the years immediately following the financial crisis of 2008 as investors shunned individual stocks.

The flight to index funds has propelled much of MCM's growth. Since Challenger joined the firm in 2006, MCM's assets have grown from $175 billion to $327 billion. At the same time, the number of MCM's investment strategies has also grown, rising from 105 at the end of 2010 to 145 at the end of June.



Challenger has spent most of his time grappling with the expansion of the firm and reining in its sprawling trading operation.

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He has overseen the consolidation of the equity trading desks of three former Mellon and BNY units into MCM, and took over fixed income trading as well.