Disrupting the fund management industry

Richard Waddington, Sherpa Funds Technology


Richard Waddington

Richard Waddington

Disruptive technologies can be fun, especially when they shake up the investment management industry. HFC’s Stefan Nilsson decided to have a chat with Richard Waddington in Singapore who recently launched the disruptive technology service Optimal Risk Sizing.


What is your background and what brought you to Asia and the hedge fund industry?

I studied physics and engineering at Cambridge and was then swept into the world of derivatives trading along with many of my peers. It was very fashionable in the early 1990s. After the usual London and New York spells trading various complex option books at Bankers Trust, I moved to Tokyo in 1999, having enjoyed my few business trips to Japan and wanting to do something different. There, I set up a derivatives modelling business, primarily interest rate options. I didn’t really know much about programming, in fact my first business expense was the book “Programming for Dummies”! However, after my studies and time at Bankers Trust, I was very much at the forefront of the mathematics and really understood the business logic. To my mind that’s a much rarer skill-set than programming. The business was good but very hard to grow as I couldn’t hire foreigners, and there was little expertise available at that time in Japan. Strangely, when I returned to London a few years later, I met a guy in a bar who, once he knew my name, immediately asked if I was the Waddington who came up with the pricing software he used in Tokyo. That was reaffirming! After Japan, I returned to London to work for my old boss from Bankers Trust who was then running FICC at Barclays. By 2006 I had a global trading role and was back in Asia, and have been in Singapore ever since.


How did Sherpa evolve from being a fund manager to also being a tech provider to other funds?

When we set up Sherpa Funds, first as a G7 FX trading fund, my primary interest was in the mathematics and process rather than the markets. So whilst my business partners at Sherpa did the asset selections, I was always looking at improving the process – most importantly how to convert the asset selection decisions of a PM into the best possible portfolio for the client. My experience told me that this was the step that many people struggle with. And after about a year of research and much pondering and experimentation, I came up with a solution that has now grown into ORS. I initially presented this, in a very rudimentary package (back to my non-programming skills!) to a large long-only fund manager, who bought into the concept and went on to use it as the corner-stone for a pitch for a large government pension mandate. They won the pitch, and so I had my first client. The ORS product had proved itself as a differentiator in the managers’ hunt for AUM.


Can you tell us about what your Optimal Risk Sizing solution can offer fund managers?

The first client that I just mentioned used ORS to raise AUM. They were able to show that the fund would be managed according to the investors’ best interest, using ex-ante active sizing methodology to manage both market risk and trading style, rather than the usual VAR or other ex-post reactive risk measure. This is a big differentiator. More importantly ORS’ main benefit lies in improving returns. By optimally sizing the assets in a portfolio, over time you improve returns. Indeed, when we test ORS on real trading data, the performances are always improved, some quite radically. This is not to say that PMs are doing a bad job, but that their asset selection skills are not being optimally expressed in the portfolios that they build. So a PM has to be a good asset selector, otherwise the portfolio will do badly. But once the assets are selected, it is a very difficult task to create a correctly balanced portfolio: one that is consistent with the goals set out, either by the investor or in the PPM, and one that, over the long term, maximizes the value of those asset selection decisions. The PM’s calls are central to everything, the ORS tool allows those calls to generate the best returns, given the portfolio’s stated goals.


What do you see as the biggest challenges for fund managers operating in Asia today?

Clearly the industry is reacting to increased regulatory and cost pressures by consolidating. That’s nothing new of course. If you look at any established industry, you can see that same pattern. But fund managers who wish to remain independent have to do something different. There is always room for boutique producers in even the most developed markets, but they have to be offering something truly different.


One of the issues in the Asian hedge fund industry is the relatively small size of assets managed by a typical Asian fund manager. Do you have cost-effective solutions for both small and big funds?

ORS is a subscription service, delivered over the web with zero IT overhead straight into the PM’s working environment. In other words, you pay for what you need, and subscription fees can be tailored to AUM. The full suite of functions, such as optimizing a portfolio with factor constraints, or pre-emptive reporting of variance-to-benchmark at an asset level, are only suitable for the larger funds. Even in their case, the monthly fee is much less than what they would typically pay for research.


Partly due to a number of asset management-related frauds in Asia in recent years, many investors are now spending more time on operational due diligence and scrutinising funds and their service providers. Has this had any impact on your business?

Sherpa Funds Technology is all about improving the returns of our client funds’ trading rather than the infrastructure of the fund. In that sense we help fund managers demonstrate good process when executing investment strategies. While this does not directly relate to the normal definition of “criminal” fraud, ORS does help prevent mandate creep and over-zealous risk taking, which are just as harmful to the investor.


What do you think the future looks like for the hedge fund industry in Asia?

The Industry is very segmented, so I’m not sure that I have any general observation that fits all the funds out there. I would say that in order to survive the ongoing consolidation, funds are going to have to embrace methods of working that challenge their established procedures, and where help is available, be open to assessing the cost-benefits of using that help. Now there’s is nothing very earth shattering about those statements, they are as applicable to healthcare as to hedge funds, and to the 1980s as today, and as a service provider with an innovative product, I am very much interested in seeing clients challenge the status quo. But none of that changes the fact that it is the truth.


If you hadn’t been working in financial services, what would you have been doing for a living?

At Sherpa Funds Technology, I am returning to my roots as a scientist and engineer: experimenting, developing ideas and building solutions. I am sure I would have always been involved in science in one way or another. Failing that I would have been a mountain guide or skier, but that’s one for the fantasy double-life!

(Aug 2015)