Starting a new fund management firm is a big job — especially amid an unrelenting recession. But David Allen and his business partner, Eugenio Pérez, have a pair of resumes that convince you they are perfect for the job, including hands-on commodities experience and experience managing a big-firm trading desk. Allen tells Advanced Trading how his new firm, EDAC Trading in Palm Beach, Fla., uses technology to improve decision making and reveals what doesn’t keep him up at night.
Tell us about EDAC Trading.
Allen: In 2011 we spun-out EDAC Trading from a much larger financial firm, where we'd incubated our trading strategies for more than five years. EDAC is the management company that my partner, Eugenio Perez, who is the portfolio manager, and I own and manage. Our goal with EDAC is simple: Build an asset management franchise that blends our experience managing physical assets with our love of technology to help us make wiser trading decisions.
What is your primary trading strategy?
Allen: Commodity-focused, long/short, using primarily futures contracts. We consider ourselves ultra-practical/ sensible in strategy design, heavily algorithmic in execution and data-dependent in R&D. We embrace the merits of both grid and cloud computing to support the strategy research we perform. We're technical guys for sure, but we come trained from the physical side of the commodity markets.
How would you characterize today's markets?
Allen: There's a lot of pain and confusion out there right now. These are rather unpredictable and jumpy markets, and people are really concerned that something in Europe or something with China is going to cause a major outside disruption to demand. Our main job as commodity guys is to navigate these macro issues and reconcile them with "real," fundamental supply-and-demand factors in the energy, grains and metals markets. It's a challenging task, no doubt.
So even with complex algos and decades of market data at your fingertips, it still comes down to human thought and judgment?
Allen: Absolutely. Just about any semi-automated system is initiated by someone who makes a decision. There are a million things that have to be decided in preprocessing before a system's actually able to run. Quite frankly, thank goodness -- that is what investors hire. They are willing to pay for that expertise. The question is whether it's working for them.
What do you look for when hiring a new trader?
Allen: A good trader today possesses many of the same skills as a good developer -- organized thoughts, efficient structures, well-tested methodology, constant stream of R&D work. There's a lot of positive overlap.
With those skills front and center, who works "behind the scenes" to make sure the operation runs smoothly?
Allen: We want to be freed up to focus on markets, strategy and development. We decided to engage a group in New York called ParkRiver Fund Solutions -- it provides non-trading infrastructure for us and other firms totaling around $5 billion in assets under management. They perform our accounting, tax, legal, and other middle- and back-office functions. I wouldn't have been able to manage the logistics of the business without them.
What is your background? What did you do before starting EDAC Trading?
Allen: I came down here from New York in 2006 and was tasked with hiring a team to build a commodity franchise inside a much larger fund management organization. But the big question was, what kind of franchise should we build?
My initial team came from a physical commodity background: logistics, risk, trading and sales. My partner managed power plants and gas assets all over the country. I was part of a private equity team that bought power and gas assets in the U.S. Previously, at Barclays, I helped manage a large desk that did energy transactions in Europe and North America.
How has this experience informed the trading at EDAC?
Allen: Our team's edge lies in knowing a bit about what makes the physical asset markets tick, and as a result it gives us insight into what drives prices. This is in contrast to a lot of purely financial traders who don't have the physical background. These folks have not dealt with volumetric, operational or other risks specific to energy, metals or agricultural markets. This can be a disadvantage for them. There are only so many teams that have managed commodity trading risks at that physical level. If you add the requirement that they also be capable business managers, too -- that is, not just P&L managers -- you thin the herd even further.
Phil Albinus is the former editor-in-chief of Advanced Trading. He has nearly two decades of journalism experience and has been covering financial technology and regulation for nine years. Before joining Advanced Trading, he served as editor of Waters, a monthly trade journal ... View Full Bio