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Q & A With John W. Henry & Company Inc. (JWH)

Company Name:

John W. Henry & Company, Inc. (JWH)

Address:

Westport, CT Boca Raton, FL

Contact Name:

Verne O. Sedlacek

Phone Number:

203.221.0431

Fax Number:

203.221.1489

E-Mail:

verne_sedlacek@jwhmail.com

Product Name:

International Foreign Exchange Program G-7 Currency Portfolio

Product Assets:

As of May 31, 2000: International Foreign Exchange Program: $77mG-7

Total Assets Under Management:

As of May 31, 2000: $1.4billion

Firm Inception Date:

October 1982

Number of Employees:

Apx. 66


Return Information

International Foreign Exchange Program

Annual Performance

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

23.6*

23.4

45.4

-37.0

65.1

38.7

4.5

-4.5

-6.3

16.9

3.7

71.1

13.9

-5.1

7.6

*Return for the period 8/86 through 12/86


Statistics

Inception (8/86) through May 2000

Annualised Performance:

15.4

Standard Deviation:

29.3

Sharpe Ratio:

0.53

Parker FX Index Rank as of April 2000:

1 out of 44


Return Information

G-7 Currency Portfolio

Annual Performance

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

n/a

n/a

n/a

n/a

n/a

48.5

14.6

-6.3

-4.9

32.2

14.5

21.0

-4.8

20.7

-3.7

*Return for the period 2/91 through 12/91


Statistics

Inception (2/91) through May 2000

Annualised Performance:

12.8

Standard Deviation:

17.6

Sharpe Ratio:

0.73

Parker FX Index Rank as of April 2000:

1 out of 44

*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS

 

1. How and when did your firm begin?

The firm began trading client accounts in October 1982. Founded by John W. Henry, JWH has employed analytical methodologies firmly rooted in economic and statistical theory. The quantitative models were designed using market principles that have stood the test of time. These models have demonstrated consistently that market prices, which may at first seem random, are actually related through time in complex, nonlinear ways. They have confirmed our basic belief that market prices simply reflect participants’ expectations and reactions to changing market dynamics.

The style of each JWH investment program is the method by which positions are taken. Both the International Foreign Exchange Program and the G-7 Currency portfolio use the three-phase forex investment style. The three-phase forex style takes a position when trends are identified, but may take a neutral stance or liquidate open positions in non-trending markets.

The International Foreign Exchange Program began in August of 1986. The program seeks to identify and capitalise on intermediate-term price movements in a broad range of both major and minor currencies primarily trading on the interbank market. Positions are taken as outrights against the US dollar or non-dollar cross rates.

The G-7 Currency Portfolio began in February of 1991. The program seeks to identify and capitalise on intermediate-term price movements in the highly liquid currencies of major industrialised nations. These currencies allow for trading outrights against the US dollar or non-dollar cross rates. With the advent of the European Union single currency of 11 countries, the currency exposures formerly traded for Germany, France, and Italy are now executed in the euro. Beginning in May 1998, the position size in relation to account equity in this program was increased 50%. The quantitative model underlying the program was not changed.


2. Who are the principals of your firm? Please provide a brief background on each.


John W. Henry

is chairman of the JWH Board of Directors and is trustee and sole beneficiary of the John W. Henry Trust dated July 27, 1990. He is also a member of the JWH Investment Policy Committee. In addition, he is a principal of Westport Capital Management Corporation, Global Capital Management Limited, and JWH Financial Products, Inc., all affiliates of JWH. Mr Henry currently concentrates his activities at JWH on portfolio management, research and new system development, day-to-day decisions involving the strategic direction and business of the firm, and frequent dialogue with trading supervisors. He is the exclusive owner of certain trading systems licensed to Elysian Licensing Corporation, a corporation wholly owned by Mr Henry, and sublicensed by Elysian Licensing Corporation to JWH and used by JWH in managing client accounts. Over the last 17 years, Mr Henry has developed many innovative investment programs that have enabled JWH to become one of the most successful money managers in the futures and foreign exchange markets.

Mr Henry has served on the Boards of Directors of the Futures Industry Association (FIA), the National Association of Futures Trading Advisors (NAFTA) and the Managed Futures Trade Association, and has served on the Nominating Committee of the National Futures Association (NFA). He has also served on a panel created by the Chicago Mercantile Exchange and the Chicago Board of Trade to study co-operative efforts related to electronic trading, common clearing, and issues regarding a potential merger. In 1989, Mr Henry established residence in Florida, and since that time has performed services from that location as well as from the offices of JWH in Westport, Connecticut. Since the beginning of 1987, he has devoted, and will continue to devote, considerable time to activities in businesses other than JWH and its affiliates including acting as chairman of the Florida Marlins Baseball Club LLC, which is operated by professional baseball staff.


Mark H. Mitchell

is vice chairman, counsel to the firm and a member of the JWH Board of Directors. His duties include the co-ordination and allocation of responsibilities among JWH and its affiliates. He is also a principal of JWH Financial Products, Inc. Before joining JWH in January 1994, he was a partner at Chapman and Cutler in Chicago, where he headed the law firm’s futures law practice from 1983 to 1993. He also served as general counsel of the MFA and general counsel of NAFTA. Mr Mitchell is currently a member of the NFA CPO/CTA Advisory Committee. In addition, he has served as a member of the NFA Special Committee for the Review of a Multi-tiered Regulatory Approach to NFA Rules, the MFA Government Relations Committee, and the Executive Committee of the FIA Law and Compliance Division. In 1985, Mr Mitchell received the Richard P. Donchian Award for Outstanding Contributions to the Field of Commodity Money Management.

Verne O. Sedlacek

is the president and chief operating officer and a member of the JWH Investment Policy Committee. He is responsible for the day-to-day management of the firm. Mr Sedlacek is also a principal of Westport Capital Management Corporation, Global Capital Management Limited, and JWH Financial Products, Inc. Before joining JWH in July 1998, he was the executive vice president and chief financial officer of Harvard Management Company, Inc., a wholly owned subsidiary of Harvard University, which at the time of his departure, managed approximately $14 billion of University-related funds. At Harvard Management Company, he was responsible for managing the areas of personnel, budgets, systems, performance analysis, contracts, credit, compliance, custody, operations, cash management, securities lending and market risk evaluation; he joined Harvard Management in 1983. Sedlacek currently serves on the Boards of Directors of the NFA, FIA and the Chicago Mercantile Exchange, and is a member of the Global Markets Advisory Committee of the CFTC. He is also a member of the NFA/FII Best Practices Study End User Expert Panel.

Dr. Mark S. Rzepczynski

is a senior vice president, research and trading and a member of the JWH Investment Policy Committee. He is also a principal of JWH Financial Products, Inc. Before joining JWH in May 1998, he was vice president and director of taxable credit and quantitative research in the fixed income division of Fidelity Management and Research from May 1995 to April 1998, where he oversaw credit and quantitative research recommendations for all Fidelity taxable fixed income funds. From April 1993 to April 1995, he was a portfolio manager and director of research for CSI Asset Management, Inc, a fixed income money management subsidiary of Prudential Insurance.

E. Lyndon Tefft

is a senior vice president and the chief financial officer. He is also a principal of Westport Capital Management Corporation, JWH Financial Products, Inc., and JWH Securities, Inc. Before joining JWH in October 1998, Mr Tefft was the director of MIS and a vice president at Harvard Management Company, Inc. where he was responsible for directing the design, development, and operation of global equity, bond, and derivative trading, accounting, and settlement systems beginning in May 1994.

Elizabeth A.M. Kenton

is a senior vice president, compliance. She is responsible for the day-to-day management of compliance, as well as overall issues pertaining to administration and human resources. Ms. Kenton is also a principal of JWH Financial Products, Inc., Westport Capital Management Corporation, and Global Capital Management Limited. Since joining JWH in 1989, Ms. Kenton has held positions of increasing responsibility in research and development, administration and regulatory compliance.

David M. Kozak

is a senior vice president, general counsel and secretary to the corporation. He is also a principal of JWH Financial Products, Inc. and Westport Capital Management Corporation. Before joining JWH in September 1995, he had been a partner since 1989 at the law firm of Chapman and Cutler, where he concentrated in commodity futures law with an emphasis on commodity money management. Mr Kozak is currently the secretary and a director of the MFA and is a member of that organisation’s Executive Committee and chairman of its Government Relations Committee. He is also a member of the Special Committee on CPO/CTA Disclosure Issues and the Special Committee for the Review of Multi-tiered Regulatory Approach to NFA Rules, both of the NFA. He is also chairman of the subcommittee on CTA and CPO issues of the Futures Regulation Committee of the Association of the Bar of the City of New York.

David I. Ginsberg

is a member of the JWH Board of Directors and special advisor to the chairman. Mr Ginsberg joined JWH in October 1999. He served as the managing director of the Multi-Manager Group at Global Asset Management (GAM) from its inception in September 1989 until July 1995. This GAM group was, and continues to be, one of the largest multi-advisor groups specialising in hedge funds. Since leaving GAM, Mr Ginsberg has been a private investor. Mr Ginsberg is a member of the board of directors of GAM Diversity, Inc., a global multi-advisor hedge fund with assets in excess of $1 billion that specialises in hedge funds, and a director of the Adelphi Europe Fund, a hedge fund specialising in European equities. He is also vice chairman of the Florida Marlins Baseball Club LLC.

John A. Wing is a member of the JWH Board of Directors. Mr Wing is also a professor of Law and Finance at the Illinois Institute of Technology (IIT) and director of its Center for the Study of Law and Financial Markets. Before joining JWH in February 2000 and IIT in July 1998, he was chairman of the board and chief executive officer of ABN-AMRO Incorporated, formerly The Chicago Corporation. Mr Wing joined The Chicago Corporation as its chief executive officer in 1981 and continued to lead the firm following its merger with ABN-AMRO in January 1997 until his retirement in July 1998. Mr Wing is currently chairman of the board for the Risk Management Committee of the Commercial Club and of Market Liquidity Holding, LLC. He is also a director of AmerUs Life Holdings. In addition, he has served as a director of the Midwest Stock Exchange, The Chicago Board Options Exchange, Securities Industry Association, Futures Industry Association, National Futures Association and Chicago Capital Fund. Mr Wing has also been a governor of the National Association of Securities Dealers, a member of the New York Stock Exchange Regional Firms Committee, and a member of the Chicago Mercantile Exchange’s special panel to review trading rules and practices. Mr Wing has also served as a trustee of IIT and chairman of the Board of Overseers of its Stuart School of Business.


Kevin S. Koshi

is a senior vice president, proprietary trading and a member of the JWH Investment Policy Committee. He is responsible for the implementation and oversight of the firm’s proprietary strategies and investments. Mr Koshi joined JWH in 1988 as a professional in the finance department, and since 1990 has held positions of increasing responsibility in the trading department.

Matthew J. Driscoll

is a vice president, trading, chief trader and a member of the JWH Investment Policy Committee. He is responsible for the supervision and administration of all aspects of order execution strategies and implementation of trading policies and procedures. Mr Driscoll joined JWH in 1991 as a member of the trading department. Since joining the firm, he has held positions of increasing responsibility as they relate to the development and implementation of JWH’s trading strategies and procedures; he has played a major role in the development of JWH’s 24-hour trading operation.

Edwin B. Twist

is a member of the JWH Board of Directors. He is also a director of JWH Financial Products, Inc. Mr Twist joined JWH as internal projects manager in 1991 and has been a director since 1993. His responsibilities include assisting with the day-to-day administration and internal projects of JWH’s Florida office.

Julius A. Staniewicz

is a vice president, senior strategist and a member of the JWH Investment Policy Committee. He is also president of JWH Financial Products, Inc. He joined JWH in 1992.

Additional principals include Christopher Deakins is a vice president, investor services, Nancy Fox, CPA, is a vice president, investment support, Andrew Willard is a vice president, information technology, Paul Braica is a vice president, analytics, Florence Sofer is a vice president, marketing, Robert Lendrim is a vice president, investor services and Wendy Goodyear is a vice president, investor services.


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

Given JWH’s disciplined systematic approach to asset management, we do not think in terms of best trades. The question assumes that we had a special level of predictability concerning the market when we fundamentally assume that we cannot predict the future. If we follow our models, in the long-run we will be able to produce an acceptable return from trends in the market.

However, the second half of 1997 was an extremely profitable time for currency trading based on dislocations associated with exotic currencies during the Asian currency crisis. A combination of many markets all suffering from the same events and a sense of uncertainty concerning the value of the currencies caused a significant number of trends that lasted longer than expected. This translated to the highest annualised return for the International Foreign Exchange Program and a significant annualised return for the G-7 Currency Portfolio. (While the G-7 Currency Portfolio experienced significant returns during 1997, annualised returns during 1991 and 1995 exceeded those of 1997.)


4. What was your most difficult period?

Clearly, there have been periodic drawdowns with programs. These drawdowns often occur after a period of successful trading as trends reverse themselves. It is always difficult to see declines after a significant run-up, but this is the nature of trend-following. A cost associated with following a trend that there are reversals that lead to givebacks.

Secondly, currencies have had periods of limited trends where the markets will stay in a tight range because of consistent and stable economic environment. These also will be difficult periods because there are no opportunities from trends.


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

JWH is a non-predictive investor. We do not form fundamental forecasts on the direction of currencies, but follow trends that may appear in market prices; consequently, we avoid specific outlooks and views.


6. What is your view on emerging market currencies?

Same as answer five, we are non-predictive in our behaviour. Nevertheless, historically, there have been periods of significant market dislocation in emerging market currencies that have been times of significant trends. We do not know when they will appear, but by trading in these markets and managing risk we believe that we may be able to capture these dislocation opportunities.


7. What types of instruments do you trade?

JWH utilises exchange traded futures, forwards contracts and physical commodities. Swaps and options may be added at some time in the future.


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

Yes. The amount of leverage within a given program will depend upon several factors which are model driven. First, the size of the position in any given market will be dependent on the volatility of the market. As volatility in a market increases the size of the position will decrease and vice versa. Each specific market has a limit on the amount of exposure that will be taken in that market. Second, if there are no trends that have been identified in a specific market, no position will be taken. Third, on a discretionary basis, adjustments to position size relative to the overall equity in the program may be made. These changes are implemented by the JWH Investment Policy Committee of which John W. Henry is a participating member.

There is no specified limit for maximum leverage of the overall program. The amount of leverage is the result of the bottom-up approach to evaluating each market.

The control of risk of the overall portfolio is also done on a bottom-up basis. The model determines the amount of acceptable loss in a position. A specific stop loss is determined on each position based on position size and volatility. This stop loss is adjusted over the life of the trade based on price action of this specific market. When that stop loss is hit, JWH will exit the position irrespective of any other market conditions.


9. Average number of positions during the month.

JWH trades or holds positions in all of the markets within the portfolio. Sometimes our models call for a neutral position where we do not hold a long or short, but a risk allocation is still present for that market.

Profit & Loss

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