Alex Dunegan, founder and CEO of Lumint, talks to Profit & Loss deputy editor, Galen Stops, about the challenges facing the buy side around selecting and evaluating benchmarks.
The WMR benchmark has come under severe scrutiny since the allegations that banks colluded to manipulate it, leading to changes in the way that the benchmark is calculated and questions from buy side firms about whether they should be using it at all.
Dunegan claims that this is a “critical” question, and provides his take on the answer.
“As a trading benchmark in terms of best execution and TCA, it may or may not be the most appropriate one, I think for most transactional activity it’s certainly not. For some of the stuff we do, currency overlay, passive hedging, tracking a hedged benchmark from MSCI World, I think in those instances it’s still highly critical to use because those are what the index providers and fund administrators and other parts of the financial infrastructure use to evaluate their prices and their foreign transactions,” he says.
Dunegan cites picking and effectively evaluating their benchmarks is the biggest challenge facing buy side firms as they attempt to achieve best execution.
“I think a lot of times people confuse a published benchmark or just the point of execution as what they need to look at for best execution,” he says. “For asset managers it’s important to look at the bigger picture, more like an implementation shortfall evaluation of best execution, from the time that the data is available to trade all the way through to the point of execution.”
According to Dunegan the various scandals that have occurred in the FX industry in recent years have driven the demand for greater transparency and scrutiny of their execution. Simultaneously, he notes that fund performance has dipped in recent years, while asset managers have endured reduced profit margins in their operating businesses.
“Every basis point counts now in a different way than it did before and I think that’s why people are looking at FX as something that they need to evaluate,” comments Dunegan.
Watch the full interview here: