A High-Speed Trading Pioneer Spots a New Way to Make Big Returnsby and
Manoj Narang starts firm to meld HFT and hedge fund strategies
Industry veteran left Tradeworx, which he co-founded, in 2015
Way up in a Manhattan tower, next door to the fabled Carnegie Hall, a pioneer of high-frequency trading explained his new idea for reaping big returns from modern markets.
Dressed in baggy jeans and a blue hoodie, Manoj Narang drew a red line across an Expo marker board. He wrote “structural” at one end and “statistical” at the other. The former, he explained, represented his old industry -- the computer-driven traders who are all about speed. The latter he identified as statistical arbitrage, a slower strategy where orders are driven by mathematical models, often based on historical price relationships.
What no one has done until now, Narang said, is focus on the middle of that red line -- the place where the two approaches meet.
“What I’m talking about is inventing and marketing something that’s in between these two strategies,” he recently told a group of employees at Mana Partners LLC, his new hedge fund firm. “You can see the economic appeal of being able to do this.”
For Narang, who founded one of America’s most prominent high-speed trading companies in 1999, the attempt at a second act reflects both his own circumstances and those of the wider HFT industry. He left his old firm -- Tradeworx Inc. -- a year ago because of what he said were differences in vision among its leaders. HFT strategies, meanwhile, have become less profitable after years of escalating competition.
While the 46-year-old has given away few details about what makes the approach at Mana Partners unique, he said the fund will begin by focusing on “volatility arbitrage.” He declined to disclose whether the firm already has clients or a target for assets under management, citing regulatory restrictions. He said Mana Partners is “looking to build a very large-scale hedge fund operation” and hopes to start trading in the next few months.
Unlike much of the hedge fund industry, HFT firms focus on finding the speediest connections to exchanges and the best fiber-optic and microwave networks to blast data across continents. The fastest traders can make reliable profits by exploiting tiny price differences across multiple markets. For example, they might spot a jump in Standard & Poor’s 500 Index futures in Chicago, and place orders to buy an S&P 500 exchange-traded fund in New Jersey before other investors there have had a chance to catch up.
Black and White
Statistical arbitrage can seem glacial by comparison. Traders hold positions for hours or days, vastly longer than the fractions-of-a-second strategies of HFT firms. A typical trade might involve buying an S&P 500 ETF when its correlation with a small-cap fund diverges from the historical norm, a bet that pays off if the relationship snaps back into place.
Narang, who helped turn Tradeworx into one of the largest traders in the U.S. stock market, has been one of the most high-profile defenders of speedy modern markets. His old firm, which provides the software powering the Securities and Exchange Commission’s Midas market surveillance system, has both a high-speed trading operation and a hedge fund. But the Red Bank, New Jersey-based company has kept them separate.
The future, according to Narang, is in merging the two approaches.
“We plan to launch a new class of innovative strategies that lie at the nexus of these disciplines,” he said. “Most things in life are not black and white. They’re shades of grey.”