Galen Stops talks to some veteran currency managers about generating returns in a world of reduced FX trends, increased regulation and evolving investor demands. Talking to individuals that have been actively trading in the foreign exchange market since Profit & Loss was launched in 1999 – and in some cases before then – it is […]
Speakers at the Profit & Loss Forex Network New York event highlighted that how you define, measure and respond to market impact when trading FX depends on a number of different variables. Opening the discussion ‘Market Impact – Finding Execution Styles that Work’ moderator Paul Aston, the CEO of Tixall Global Advisors, argued that while […]
The increasing automation of the FX markets is changing how firms manage their risk, said speakers at the Profit & Loss Scandinavia conference in Stockholm in October 2018.
Marian Micu, director of quantitative research at Qube Research and Technologies, highlighted the emphasis on new technology and automation in trading by pointing out that five years ago he had no machine learning specialists on his team and that now over half of them are machine learning traders or researchers.
Micu went on to explain that in the past, news that was likely to impact prices in the market mainly came from scheduled announcements from sources like the European Central Bank (ECB) or the Federal Open Market Committee (FOMC), and that such announcements could be very well monitored and understood by a team of human traders and then integrated into the trading strategies.
Despite a decline of investment into actively managed FX funds in recent years, speakers at the Profit & Loss Forex Network New York conference expressed optimism for these funds.
Chris Solarz, a managing director at Cliffwater, a firm that provides investment advisory services, explained that hedge fund strategies in general have struggled to outperform indices since the financial crisis, both on an absolute and relative basis.
“Someone mentioned on an earlier panel that it’s not fair to compare hedge fund strategies, hedge fund indices, to the S&P – but in the industry 10 years ago, that’s not at all how we were selling it.
Even when implementing passive currency hedging strategies, it’s still important to think in terms of alpha, explained Jay Moore, a senior vice president at Brown Brothers Harriman (BBH), during a panel discussion at the Profit & Loss Forex Network New York conference.
Although this might initially seem to be a contradictory statement, Moore explained that providers of passive hedging services can differentiate themselves both through risk management and what he termed “operational alpha”.
While portfolio risk obviously isn’t a concern when implementing passive currency strategies, Moore explained that there is a strong focus on managing other types of risk, such as regulatory risk, operational risk and managing the fiduciary risk that managers have on behalf of the funds that they outsource to firms that are providing the passive hedging.
Momtchil Pojarliev, deputy head of currencies at BNP Paribas Asset Management, talks about some of the misconceptions that exist amongst institutional investors regarding currency hedging.
For example, he explains that in the past, some firms have been unclear on the exact difference between absolute return strategies and active hedging.
In the former, the aim is to produce risk-adjusted returns that are as high as possible for a given volatility. The currency manager is allocated a notional amount of funds and can invest in any given currency to try and produce the maximum amount of returns possible.
Philippe Bonnefoy, founder of Eleuthera Capital, explains why the FX industry suffers due to a lack of an effective industry benchmark.
Bonnefoy discusses why the 4pm Fix can be beneficial, but points out that it also suffers from potential gaming. He then adds that benchmarking remains a huge issue for investors trying to work out whether they should consider FX as an asset class or not.
“With an equity benchmark, you know what the index is doing, for fixed income you know what the composite bond or the bond benchmark in 10-year Treasury is. For FX, is it cash? Is it a three-month yield? Is it overnight pricing? How do I say that you created value for me in trading FX other than just saying whether you were positive or negative?,” asks Bonnefoy.
Adrian Lee, president and CIO at Adrian Lee & Partners, explains why combining currency hedging with alpha generating strategies can benefit investors.
When questioned about whether clients are looking for hedging or alpha from currency managers, Lee responds that many clients actually need both simultaneously.
He continues: “The challenge of risk management is that currencies are a biggish risk – there’s no long-run return really, so on paper it makes sense to reduce it. But when you start to do these hedges after you’ve got the international assets, you’ve got to get the currency exposure back… with that [you have] really strong cash flows because if you hedge half your 20% international, it’s 10% of your whole portfolio. If that goes against you [the impact on] performance in a quarter could be massive.”
Hasan Amjad, head of algorithmic trading at GAM Systematic Cantab, explains how machine learning tools and techniques have enabled his firm to improve almost every aspect of its trading capabilities.
“It goes all the way really,” he says, “Starting with portfolio construction, all the way to the final trade and the post-trade analytics.”
For example, Amjad points out that machine learning can be used to improve pre-trade analytics by more effectively identifying what kind of trading the firm should be engaging in during current market conditions. He concedes that there are other techniques that enable firms to determine market conditions, but that “machine learning just takes it that one step further by being able to ingest a lot more data and give you the answer”.