(Bloomberg) -- UBS AG is starting a unit aimed at quantitative hedge funds that combines prime brokerage and services from its direct execution trading business.
Scott Stickler in New York will be global head of the operation, called UBS Quant HQ. Strategies across equities, options and futures will be supported with fixed income and foreign exchange to be added later, he said. The business targets startups and established funds with long-short or hedged strategies and those focused on arbitrage.
Investment firms formed as a result of regulations to curb risk-taking within banks are looking for help with technology consulting services, trading and financing, according to Stickler, who was hired in July 2011. The unit began working with more than a dozen hedge-fund clients in the second quarter as it prepared for the Quant HQ introduction, he said.
"One of the trends we're seeing is a number of startups, folks coming out of big banks because of the Volcker rule and starting their own hedge funds," Stickler said in a phone interview. "Clients are coming to us who wanted us to be in this business and who want to be able to take advantage of our global presence and our counterparty safety, stock-loan and execution capabilities."
The Volcker rule, part of the 2010 Dodd-Frank regulatory overhaul, will limit the risks that deposit-taking banks can accept. The rule, which hasn't been finalized, aims to reduce proprietary trading at banks.
The UBS group will draw on the bank's prime brokerage services to help hedge funds raise capital from investors looking specifically for quantitative strategies, Stickler said. It will also help funds decide what types of technology equipment, networking services and computer servers they may need to support their strategies and process trades, he said.
Dave Mishoe will be regional head of Quant HQ for Europe, the Middle East and Africa and Steve Hammerton will have that role in the Asia-Pacific area. Both will report to Stickler.
Stickler was hired to build Zurich-based UBS's business with funds that analyze large amounts of data to make investment decisions and engage in the "systematic implementation" or electronic execution of those strategies, he said. Integrating offerings in prime services and direct execution and adding products to fill gaps at UBS will make it easier for funds to get the services they seek from one unit, he said.
"This is a new client acquisition endeavor," Stickler said. "We've been seeing a migration of investor interest to more liquid strategies and those that are more quantitative in nature. That's why we're focused on this."
UBS, Switzerland's largest bank, posted a 58 percent drop in second-quarter profit in July, hurt by a loss at the investment bank related to the initial public offering of Facebook Inc.
The bank installed "strong risk-management systems and procedures" for clients using the Quant HQ service, in part so it can expand the business across asset classes and regions, Stickler said. The systems will also help ensure clients are hewing to their strategies in real time and enable UBS to give quantitative funds more financing intraday, he said.
"Some funds may require more leverage intraday and more systems to monitor that," Stickler said. "We're now able to right-size leverage based on the strategy and the hedged nature of the strategy."
The initiative comes as global trading has declined across asset classes following a slowdown of economic growth in the U.S. and China and intensification of the European debt crisis.
Daily U.S. equity volume averaged 6.63 billion shares this year, 15 percent less than the average in 2011, according to data compiled by Bloomberg. Almost 4.3 billion contracts in U.S. futures and options on securities traded in the first seven months of this year, compared with 4.6 billion in the same period in 2011, data from the Futures Industry Association show. Non-U.S. futures and options volume declined 12 percent to 7.4 billion contracts in the first half of this year, the FIA said.
UBS is the eighth-biggest prime broker, according to a ranking by client assets in Global Custodian magazine's 2011 survey. Goldman Sachs Group Inc., Morgan Stanley and Credit Suisse Group Inc. are the top three, it said.
The three largest prime brokers and Barclays Plc are among the banks pursuing hedge funds and proprietary trading firms engaged in quantitative and arbitrage strategies, said Larry Tabb, chief executive officer of New York-based research firm Tabb Group LLC. Regulatory developments such as the Volcker rule and Basel III specifications on capital requirements are boosting banks' interest in fee-based services, he said.
"Regulatory changes are forcing the banks to shrink, so with banks not wanting to take principal risk they're leveraging their infrastructure to try to support new entrants into the market as well as hedge-fund spinoffs," Tabb said by phone. "That way they can continue to keep the flow, generate fee- based income and reduce their proprietary trading risk."
There were 9,700 hedge funds and funds-of-funds in the second quarter, more than in any year except 2007 when the total exceeded 10,000, according to data from Hedge Fund Research Inc. The number of hedge funds rose to a record 7,768 in the second quarter, the Chicago-based firm said in an Aug. 7 report.
Clients of the UBS group can choose among four tiers of execution services, ranging from low latency to ultra-low latency, Stickler said, referring to offerings that enable customers to send orders to exchanges or other venues with minimal delay. Risk filters and checks that became mandatory for orders sent to markets last year take a maximum of 60 microseconds, or millionths of a second, he said. Clients' orders can go through that process faster if speed is critical to their strategies.
Building the technology infrastructure and systems needed to implement trading strategies can be "prohibitively costly" and too time-consuming for many funds, Anthony Dostellio, managing partner at Objective Paradigm, a technology recruiting firm in Chicago, said in a telephone interview.
Most firms that don't compete exclusively on speed are likely to adopt a "blended environment," where they build some of the technology themselves and purchase the rest from vendors and brokers, Dostellio said. Reliance on services from banks may grow as existing firms expand into new regions or asset classes, he said.