Back to the Past: 1980s Redux?

This is a confounding time to be in the capital markets. We seem to be surrounded by incredible change on every front. For better or worse, political, economic, regulatory, and health shifts have created a traditional “trader’s market” — a market that proves the grit of folks, and the merits of active strategies. From a rates perspective, we have to go back in time to the 1980s (yes, big hair, Back to the Future, suspenders, and compact discs (CDs)) to make sense of some of the charts traders are watching.

Commodities are on a tear this year, on the back of 2021, their largest annual increase since 1979/80 and inflation rates are like those in the 80s. The record low ten year treasury yield of 0.54% seems like a dream now as it crossed above 3.0%. Traders and hedge fund managers are staking their money, and their investors’ money, on whether these are ephemeral, transitory moves, or the start of a new rate regime. What happens next will be battled in the markets. That is the challenge and the opportunity of this type of market.

Hence, it is no surprise that inflows into hedge funds continue. An article published by Institutional Investor entitled Asset Owners Haven’t Put This Much New Money Into Hedge Funds in 7 Years states “institutional investors deployed $19.8 billion in hedge funds in the first quarter, marking the highest quarterly inflow in seven years, according to the latest report by Hedge Fund Research.” This follows strength last year as we described in 2021: A Surprising Year for Prime Brokerage. It also confirms AIMA’s Global Review of 2021 which found that the bulk of institutional investors from family offices, foundations and endowments, and corporate pensions were increasing allocations to hedge funds in 2022.

The similarities with the 1980s does not stop with just rates and inflation. While the music CD is long gone, some of the core technology that underpins the capital markets is actually from that period. We can all appreciate the challenges that come with deciding the right bet to make in the market; but in 2022 no one should be struggling to put on that trade (or process) because of antiquated technology.

We see this in the rails of the market, in onboarding, but also in equity finance and stock loan– where legacy workflows and processes dominate. Even in trading, we have seen significant efficiencies in index names, but trading the individual stocks, the SPACs, anything less liquid, is difficult. The easy trades get done, the hard ones are pushed aside.

Traders want the best tools to optimize their opportunity for alpha. Yet, we see a lot of friction around their overall market experience. Frictions in access, antiquated infrastructure, inability to integrate systems decades apart, and stagnant data, usually siloed by asset class. This all leads to difficulty implementing strategies, manually intensive processes that limit agility and increase risk.

Nowhere is this pain more evident than with firms that have the most to offer to investors: emerging hedge fund managers, startup funds, or funds with special requirements to employ complicated strategies. These types of funds are often stymied by lack of service–and for their traders, regardless of how old they actually are, it probably feels like 1981.

Fintech players have already changed much in the financial services including retail brokerage, retail banking, and payments. What they have not yet done is change the institutional capital markets, the core of the financial markets. The status quo reigns supreme. Capital market firms — prime brokers, equity financing platforms — have not invested in improving access and infrastructure.

We see these pain points with our clients. We are empathetic to their experience because it is our experience as well. Like our clients, we don’t get it. That is why Clear Street made the investments where others did not and is building out its cloud based proprietary capital markets platform. We are bringing together top talent to improve market access and put the client experience first.