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Q & A With Jacobson Fund Managers Ltd.

Company Name:

Jacobson Fund Managers Ltd. (“JFM”)

Address:

London

Contact Name:

Jenny Hackett

Phone Number:

+44 20 7235 2472

Fax Number:

+44 20 7245 0120

E-Mail:

Jhackett@jacobson.co.uk

Product Name:

Jacobson Currency Programme

Product Assets:

USD $49.5 million

Total Assets Under Management:

USD $49.5 million

Firm Inception Date:

Business commenced in August 1993 and was incorporated as JFM in February 1996

Number of Employees:

8


Return Information

Annual Performance

1995

1996

1997

1998

1999

19.3%

60.87%

1.51%

41.69%

22.86%


Statistics

Annualized Performance:

30.2%

Standard Deviation:

5.64%

Sharpe Ratio:

2.0

Parker FX Index Rank as of December 1999:

9 out of 48


 


1. How and when did your firm begin?

The firm began by establishing a business in 1993 whose main interests were to provide currency risk management as part of an overlay strategy to international bond and equity portfolios. These portfolios were being managed by large institutional clients, which included insurance and pension investors. The fundamental idea was to achieve an optimal currency risk management strategy whilst reducing the cost of the more traditional dynamic currency hedges which were available at the time, using currency options. We implemented an extension of Modern Portfolio Theory where the assets were the relevant currency pairs. This service was offered on a consulting basis and was considered a passive strategy. Within two years of implementing this approach and developing the clientele, demand grew for us to use the same principles to actively trade a currency portfolio. Our first client in this area became Chescor Ltd in February 1995. Since that time, the business has grown into a discretionary management firm and remains specialised in the G7 currency universe. By 1996, JFM was formally incorporated and regulated by the SFA in the UK. JFM was subsequently regulated by the NFA in the US starting in 1998.


2. Who are the principles of your firm?


Kathryn Whinney

commenced her professional career after university with First Chicago Bank in London in 1983. Since that time she developed an interest in financial management and accounting and became professionally qualified as a Management Accountant and as a Chartered Secretary. She has had a successful career working for companies such as MacDonald Douglas, Maserati and with the accounting firm Latham Crossley and Davis. In the mid-1990’s she joined Market Data Systems as Finance Director and enabled the international growth of the business until its acquisition in 1996. She was responsible for the development of major projects such as CIBC Bank in Toronto, HSBC Bank in London and Royal Bank of Scotland. She joined JFM in 1996 to establish the business as its Head of Finance and Compliance.

Henry Green

began working for the Royal Trust Bank of Canada in 1986 and continued his career development between the City of London and Wall Street in areas of quantitative research and risk management. His main interests were extensively developed in the time leading up to 1991 when he and Michael Pearson produced the first quantitative trading models while working at Hill Samuel Bank. He then worked on a consulting basis with a number of major banks including Sumitomo Finance International, Credit Suisse and Goldman Sachs. He commenced the business, which became JFM in August 1993 along with Henry Livingston who has remained with JFM and now heads US Client Relations. Green’s prior background included having worked for Rockwell International/NASA on projects that supported the launch of the first space shuttle, Columbia. He has a PhD from Imperial College, London and a MSc from University of California, Berkeley.

3. Please describe your best trade ever and when it occurred.

In May 1995 when the USD/JPY undertook a significant up and down reversal. We were able to trade using the systematic tools developed by JFM both the rising and declining price movements, which occurred over a few days. This single trade made over 9% unleveraged return on equity in 2 days.


4. What was your most difficult period?

The second half of 1997. Until that time trading was based on a portfolio of only three major currencies – USD/JPY, USD/DEM and USD/CHF – with a fixed allocation to each. Including the cross-rates, this allowed a reasonable diversification and showed that our independent currency trading models were working. However, during 1997 the global economic structure changed considerably and although the trading models continued to work, the fixing of allocations and not re-balancing imposed limitations in terms of benefiting from the risk/return diversification and the rate of return decreased. Consequently, in early 1998 we implemented two major changes to counter this down turn. The first of these was to allow daily re-balancing of the weighting of each currency in the portfolio. Secondly, we expanded the number of underlying currency pairs from three to six. Our current system now includes 21 cross pairs, however, we only execute the net USD positions relative to the AUD, CAD, CHF, EURO, GPB and JPY. Since these changes were introduced, our rate of return has increased considerably. The return for the last two years has been 74.5% with a standard deviation of 5.64%. On an annualised basis these numbers provide a measure on the Sharpe ratio of 2.0 since increasing the programme’s diversification.


5. What is your outlook about the direction of the JPY, USD and Euro for the remainder of the year?

The JPY will remain volatile. Although our trading style does not look at market direction per se, we believe that the JPY will continue to weaken due to the large interest rate differential between the US and Japan and what appears to be a widening differential between Europe and Japan.

The Euro, however, is a political currency that has been subjected to ongoing credibility problems. There is even greater uncertainty as to whether it will even be around as a currency in the longer term. Many forces prevent the Euro from gaining a foothold on a global basis including the ongoing political differences throughout Europe and the confusion that shrouds the actual official policy on the currency. We expect rebounds in the Euro upwards but also give the downside equal weighting.

The USD is a different story. In effect, it has been a steamroller that has gone out of control and whilst it might be very strong at the moment, this is all very relative and is susceptible to huge depreciation in the medium to longer term. The US economy lives on credit. Also, one cannot expect investors to continue to invest in high-tech companies that have 5-year track records of no earnings with their share prices at record highs. The events that are likely to happen are huge consolidation in the Internet and high technology sectors. It is not a case of “a bubble bursting” so much that it will be letting out some of the air. Historically, the USD has been able to sustain large ups and downs in the underlying securities markets and so we expect it to continue strengthening in the near term. At the same time, there is the expectation that its strength will decline and this should not surprise anyone. The argument for the USD could be continued ad infinitum in terms of whether it should go up or down but it is a mute point. What actually happens in practice is what counts and at the end of the day, investors should realise the importance of continuing to assess the value of the USD and not its exchange rate in relation to other currencies.


6. What is your view on emerging market currencies?

Emerging market currencies are less likely to remain as obscure and esoteric as many investors historically have perceived them. One of the most important parts of globalisation is that it no longer matters where you are in terms of obtaining products and services. With the growth of global consumer markets being driven by technology, people will be less interested in labelling a currency as “emerging market” and simply refer to it by its name. Clearly, the less a currency is considered an international currency the more it will stand out in terms of it being different. The simplest example of this is with reference to liquidity. The G7 currencies have the highest degree of liquidity. Move away from the G7 currencies and liquidity becomes a major problem, but only when trying to deal with very short-term transactions. We see more investors looking to invest in their domicile currency than ever before. It is a question of trade-off and there are many sophisticated risk management products available to work with emerging market currencies without undertaking open-ended risks. Watch out for the Asian currencies as potential top performers in 2000. In terms of fair value, the currency for Korea, Indonesia and the Philippines is undervalued.


7. What types of instruments do you trade?

These days we trade mostly spot FX in the interbank markets. We have clients who still prefer using IMM currency futures and we execute these on the interbank markets and do standard EFP Give-Up’s with their brokers. We do not trade currency derivatives or forwards. All our transactions are completely transparent which is very important to our clients.


8. Is leveraged used? If yes, maximum leverage amount? What is average leverage amount?

Yes, leverage is used. Since we trade spot FX, the amount of leverage used in relation to the margin to equity ratio depends on the comfort of the client. The typical margin account we manage for trading is funded with a 15% margin to equity. In practice our trading shows that our daily margin to equity can be kept as low as 7% and still not have margin calls. The overall average across all the accounts traded is equivalent to a leverage of four times. This has increased from an average of 2.5 over the last few years, which has been the basis of performance track record to date.


9. What is the average length of time positions are held?

Positions are maintained on a day-to-day basis. This means that we may be trading long dollars against the CHF over a period of days or weeks. During this time, we may adjust the size of the position up or down but still remain long dollar. In the same way, we treat all of our positions so that the tendency of the portfolio remaining long or short dollar against currencies is adjusted incrementally.

Our overall objective is to trade a portfolio with an overnight VAR between 1% to 1.5% of the notional position size traded. Our historical performance shows that this is achieved consistently in practice.


10. Average number of positions during the month?

Assuming 20 trading days define a trading month, we may have positions for at least 70% of the time which are either net long or net short USD. During the course of the month, these positions may be adjusted on a daily basis by as much as 10 or 15% increasing or decreasing the level of long or short dollars. Very specific rules are followed in terms of portfolio and money management. We are also extremely disciplined in determining when either a new account can commence trading or when to re-enter the market after profit taking.

Profit & Loss

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