Speaking with 3Edge’s Dan Zraly
Head Trader at 3EDGE® Asset Management, LP
At this Boston shop, a quantitative strategy with heavy reliance on computer models is focused not on nanosecond trading, but in reducing client risk.
As a technology-based company, we thought it would be particularly interesting to speak to one of our users who comes from a similar world. Dan Zraly, a native New Yorker, has been applying his software background to investment and trading challenges since soon after he earned an M.S. in Computer Science from Pace University in New York City.
His first job out of graduate school in 2001 was with Deutsche Bank, where he began in their graduate training program. His first rotation was with the trading department. While working there a change in ownership of the bank’s third-party trading software set the company off on a development effort. Zraly found himself first in the midst of this effort and before long in a leadership position on a team of developers which eventually spanned the globe and counted its members in the hundreds. The end product became the core equity trading program for the company worldwide.
The software, which allowed the trading of thousands of securities in one operation, was particularly well suited for ETF arbitrage trading and Zraly made the transition from developer to trader. His deep understanding of the software made him valuable in seeing to its most effective implementation in ETF arbitrage, taking advantage of small variations between an ETF’s market price and a matching basket of stocks. He advanced to head the ETF trading desk and co-head program trading. In this high-intensity job, he handled client trading blocks as large as a billion dollars. In 2013, he left Deutsche Bank for BNP Paribas where he started a fixed income ETF trading desk.
While running client facing ETF trading desks at Deutsche Bank and BNP Paribas, Zraly interfaced with an independent investment team led by Steve Cucchiaro. Since they kept their order flow with Zraly, he was able to provide Cucchiaro and his colleagues with trading advice and advantageous trade execution. In 2016 when Cucchiaro launched Boston based 3EDGE Asset Management and approached Zraly to oversee their trading, he decided to join the firm. In doing so, he was part of a general trend which goes back to the financial crisis of 2008 of bank-based traders moving into hedge funds and other independent companies.
For a long-time New Yorker, he seems to have adjusted nicely to the Boston lifestyle. “Not only is the pace here a little more toned down, I can walk from home to work. No subways, no commute, how can you beat that?”
The 3EDGE® approach to money management
3Edge was founded in 2016 under the leadership of Stephen Cucchiaro, whose research in nonlinear dynamic systems and portfolio management theory dates back more than 30 years to his pioneering work while a student at the Massachusetts Institute of Technology and The University of Pennsylvania’s Wharton School of Business. The principals of the employee-owned firm, who include entrepreneurs, engineers, and mathematicians, developed a proprietary quantitative model which analyzes global assets. This model weighs cause and effect and correlative effects of multiple inputs with the objective of determining asset classes which appear poised to either underperform or outperform. But the process isn’t just a black box. The model’s output is carefully evaluated based on the principals’ experience and judgment. The strategy is deployed primarily via ETFs. One of the primary goals of the resulting portfolios is the reduction of loss in down markets. Portfolio allocation is also matched to investor risk, primarily via appropriate exposure to equities. Clients include investment advisors, non-profit organizations, family offices, endowments, and individuals. Assets under management have grown to approximately $900 million in the first three years of operation.
“What we often find is that the model uncovers non-intuitive relationships. For instance, there is a well-established literature on how, say, an inverted yield curve is likely to affect equity prices. But that relationship is binary: yield curve and future stock market action. Our model is non-linear with a many-to-many analysis of interrelated relationships and variables.”
There are three basic categories of data going into the model: global macro-economic data such as yield curve, credit spreads and CPI, behavioral data such as sentiment, and valuation data such as price to sales and relative valuation versus other indices. The result is a unique look at the projected prospects for major global assets classes such as the U.S. equity and bond markets, international markets, currencies, and real assets such as gold and commodities. Because of their belief that markets tend to be micro-efficient, but macro-inefficient, all holdings are broad-based ETFs which track various asset classes.
More information on the firm’s strategies can be found at their website at 3EDGEam.com.
3EDGE and Blaze Portfolio
The search for a trading and rebalancing tool had begun when Zraly joined 3EDGE a few months after its inception. He was immediately involved in reviewing and testing the possible solutions.
“We had some specific needs which we needed addressed. The software had to connect smoothly with our portfolio management system. We had to be able to load a revised model into the system and apply it to hundreds or thousands of accounts. Finally, we needed the software to block these trades and execute them efficiently as single orders.”
One of the attractions of Blaze Portfolio was that there was initially no need for any customization. “Blaze had full capabilities for all of our primary needs.”
Zraly and the 3EDGE team began using Blaze for the daily collection of all client accounts across multiple custodians, giving them constantly updated holdings information on what could be bought and sold. Rebalancing those accounts to a revised model is typically a monthly action, although unusual market activity or conditions can trigger intra-monthly trading. Blaze’s block trading capability ensures universal execution and reduces regulatory and compliance complications. Just as importantly, Blaze facilitates the allocation of the block trade back to the myriad of accounts across the various custodians.
“Blaze is also web-based, which means we don’t have to install a program to a specific computer. We can get access to Blaze at a number of workstations or sites, which is also a boon to any disaster recovery effort we might face.”
Since their adaptation of Blaze, Zraly notes that a number of customizations have been accomplished, such as a year-end tax-loss harvesting solution. Another is a security-equivalence feature.
“What I like about Blaze is the way it feels streamlined — it’s not cumbersome or bulky. You can navigate through the program efficiently. On top of this, the support is always excellent. As soon as I pick up the phone and ask about something I get an answer immediately. The support staff is very knowledgeable about the product — I don’t have to typically wait while they go research the issue.”