Volatility to spread from Asia to globe: CQS

Volatility is likely to rise again on a global basis, and that will provide investment opportunities, argues Michael Hintze, chief executive of UK hedge fund CQS.

“While in Asia markets have been more volatile, I think we will see a return to volatility in asset prices more broadly and in the West in particular.”

This return to more volatile market conditions should favour asset classes such as convertibles, credit long/short and equity/long short as well as short-duration assets such as asset-backed securities and loans, he adds.

“Downside protection is important and has grown cheaper as a result of forward guidance [from central banks], and I see a lot of opportunity from the distortions created by regulation and central bank actions,” notes Hintze. “We are in a fascinating market environment.”

He, however, raise issues around how the traded markets are developing, given the growing use of electronic venues.

Most of CQS’s equity trading is done on exchange, says Hintze, “but a lot of electronic interaction can be sucked into a dark pool”.

“We have a very strict policy on best execution; we monitor transactions very closely to make sure clients get the best pricing possible,” he notes. “But it’s becoming more complex. For example, to buy 100 shares in IBM, you can go to so many different places.”

The bigger long-only players spend a lot of time on information technology services, says Hintze. “But the fundamental question here is: when is an order not an order? The game in HFT used to be how to access the market quickly enough; the game now seems to be, how quickly can you get your order out of the market?

“This is what the regulator should be worried about: the difference between liquidity and activity,” he notes.

“We’ve held trades for two to three years, core positions. That doesn’t mean we don’t trade around them, but the reality is that we’re not just price-jumping.

The regulators are right to look at this type of market activity because if it’s done incorrectly, it will be a source of instability

But Hintze is clear about the benefits of e-trading. CQS electronically executes swaps on currencies, as well as contracts for difference, credit default swaps, etcetera, he notes. “That’s quite helpful – it removes a lot of execution risk.”

Hintze also told AsianInvestor recently that the hedge fund is planning to expand its team in Asia.