Shoreline Goes Abroad

Go west (and east), young man

Small and midsize hedge funds increasingly want help in executing and clearing trades abroad, say officials of Shoreline Trading, which recently announced new overseas alliances. Shoreline, offering mini-prime brokerage and agency execution services, will now have new connections in Asian, African, European and Australian markets through its Global

Prime Services operation. The alliances, or connections, will be through Goldman Sachs Execution & Clearing, JPMorgan and Credit Suisse Securities.

Shoreline Trading Group, with offices in New York, Los Angeles and Santa Monica, was founded in January 1997 in New York (see sidebar for more). The firm has numerous former Spear, Leeds & Kellogg and Goldman Sachs officials. It still has strong ties to Goldman. Shoreline officials say they refer big prospective clients to Goldman, which refers smaller clients to Shoreline.

Shoreline officials say the overseas initiative resulted from client needs. The client is typically an emerging market manager. Many of these managers face difficult times. They must invest in relatively new markets at a time when markets are volatile. So managers wonder about the quality of the trading and execution services and are still spooked by the Bear Stearns disaster. Their typical manager, Shoreline officials explain, is someone who didn’t just start a fund, but has 10 years or less of experience. But they also concede that domestic factors are partly pushing them to diversify abroad. In announcing the expansion, Shoreline officials also said they were doing so because of the “ongoing contraction and volatility in the domestic markets.”

But a Shoreline prime brokerage official, in a recent conversation with Traders Magazine, agreed that there are also many hazards in trading and clearing in diverse European, Asian and African markets. Almost every market has different rules and customs.

What are the most common trading and clearing problems? And how will Shoreline reassure clients that post-trade problems won’t ruin what seemed to be a good trade? Recently, Shoreline trading partner Michael Murray, who runs prime brokerage services from the New York office, discussed these issues with Traders Magazine.

TM: Why did you do this now?

Murray: It started with our clients. For the kind of clients we have, access to trading in global markets is an underserved area right now. Just getting access to trade on those markets can be difficult.

TM: An example?

Murray: For example, buying 10,000 shares of Microsoft in the U.S. is easy. Our clients are saying just the ability to trade in the U.S. is no longer their only focus. The opportunity to trade shares of Angang Steel (347.HK) in Hong Kong can be a valuable opportunity for our clients.

TM: You say that you are doing this because the clients have been asking for it?

Murray: Yes, clients want the access to places like Hong Kong and they also want a top-tier custodian like Goldman Sachs.

TM: Your clients are the smaller hedge funds, those with $200 million or less of assets. You’re betting that they’re going to be very interested in your overseas connections. Who are these typical clients?

Murray: There’s a segment of the asset management business-hedge funds, registered investment advisers-that don’t fit the platforms of the big bulge bracket firms. And that’s where we come in, offering the prime brokerage services of our custodians.

TM: Your typical emerging manager employs what strategy?

Murray: Our typical client uses long/short equity strategies, but also uses options and futures, as well as fixed income, both U.S. and international.

TM: So you think you can make money betting on small funds that are ignored by big brokerages. How?

Murray: Most of today’s larger funds started as much smaller funds. It’s funny. You can have a $200 million fund that can be actively traded and uses leverage. Or you can have a $500 million fund that doesn’t trade as often and doesn’t use leverage. So from the broker-dealer’s viewpoint, the first fund can be a great client even though he only has $200 million.

TM: Once your client has gotten into the market because of these connections, how will the trades be executed and processed?

Murray: We will be able to use a local broker in the market or one of your three custodians, such as Goldman Sachs, which has its RedIPlus EMS system.

TM: How do you choose the agent to use? How do you choose the trading method? Electronically or manually?

Murray: Obviously, if you can do it electronically, that’s how you’re going to go about it. But what if that market is open at two o’clock in the morning Eastern Time? If someone here is awake at two o’clock, then they can do it electronically. However, it can be better to have my desk the night before give the order to the local broker and let him execute the order when the market opens there.

TM: Let’s talk about the hazards of these trades. What are they?

Murray: Two things. One is universal liquidity, knowing your entry and exit points. The second is simple. The rules and regulations are different from our U.S. markets. In some markets, shorting is not available.

TM: An example?

Murray: As an example, we have seen recent changes in short-sale restrictions in Pakistan and China. In some exchanges you actually need to be registered on the exchange. They want to know who the trader is.

TM: That’s your argument for having a local agent.

Murray: Yes.

TM: Let’s talk about post-trade. You have three custodians you use. Why?

Murray: Our clients are looking to have a choice of prime brokerage services. Also, clients these days will often say they want their assets held at two or more custodians. It’s important that we can say that we’re able to facilitate multiple prime brokerage relationships.

TM: Why?

Murray: Unfortunately, our clients, everyone’s clients, are living with a different environment since last March [Murray is referring to the demise of Bear Stearns], when some clients had all their money with one custodian.

TM: And they feared that their assets were frozen because of their broker’s problems.

Murray: Exactly

TM: Because of volatility in the U.S. markets combined with the ripple effect of volatility in foreign markets, you believe antsy hedge fund managers need multiple safeguards to feel comfortable?

Murray: That is correct. It’s not just operational responsibilities; it’s fiduciary responsibilities that they now have. So we are offering clients multiple prime brokerage choices. I can’t say these measures will solve all their problems. But I can say if you want your money with the best custodian to minimize what happened in March, then we can help you with that.

TM: Thanks for your time.

Murray: You’re welcome.

 

SIDEBAR: Shoreline’s History

Shoreline Trading Group LLC began in New York in 1997 as an introducing prime broker. Among Shoreline’s clients are emerging managers; traders recording off-exchange transactions; active, full-time professional traders; and hedge fund portfolio managers.

A few years after its founding, Shoreline started offering institutional agency trading and order-execution services. 

In 2002, the firm added a New York team in downtown Manhattan. Shoreline opened a Santa Monica, Calif. office in 2005 and established an affiliated fund administration firm, Panoptic Fund Administration, in late 2006. Shoreline Trading Group offers the custody, execution, clearing and reporting services of Goldman Sachs Execution & Clearing, JPMorgan, Credit Suisse Securities and Fortis Securities.

Shoreline has 15 brokers and sales traders in its three offices.

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