A Different Kind of Alpha

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.
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AI in Trading: Human Ingenuity on Steroids

One of the key benefits of the use of artificial intelligence (AI) tools for trading is that it can massively enhance human capabilities, explains Andrej Rusakov, CEO of Data Capital Management. “The way I see it is that AI can really put human ingenuity on steroids,” he says. “What I mean by that is that it really allows you to take way more data points into account and find structures in data sources that are impossible for the human eye to spot.” Rather than displacing humans, Rusakov explains that this technology is most effective when it is deployed in tandem with a human understanding of how markets work. When building strategies, his firm uses this understanding of markets and then codifies and enhances them by using AI, and in particular machine learning, tools to find new patterns in different data sets.
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Understanding the Limits of AI in Finance

Artificial intelligence (AI) and machine learning have become buzzwords in financial services, but while this technology can be applied in finance in numerous ways to improve returns, it also has some significant limitations that market participants should be aware of. This was the message from speakers at the Profit & Loss Forex Network New York conference, on a panel discussion titled  “AI: Regular Quants with a Bigger Bazooka?” “In my mind the biggest problem with machine learning in its application to finance is the problem of non-stationarity.
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Cryptos Poised to Go Mainstream

Traditional financial services firms, such as banks, are clearly poised to enter the crypto space, explained speakers at the Profit & Loss Forex Network New York conference. “Banks are going to make so much damn money off of cryptocurrencies,” said Nikhil Kalghatgi, a partner at CoVenture, a firm that has a multi-strategy asset management platform for cryptoassets. “They're chomping at the bit, laying the pipe right now in order to get connectivity, to answer all the regulator’s questions.” When thinking about the evolution of technology underpinning cryptocurrencies the key question, according Kalghatgi, is whether it has the potential to be an Internet-sized phenomenon. He pointed out that there was a clear gap between when people first heard about about the Internet and then started using it, and that cryptocurrencies could follow a similar adoption trajectory.
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Dispelling Misconceptions About Currency 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.
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Credit, Not Custody, the Biggest Challenge in the Crypto Space

David Mercer, CEO of LMAX Exchange, talks about why a lack of credit, rather than custody solutions, is the biggest single challenge facing institutional market participants wanting to trade cryptoassets. LMAX offers a crypto custody solution through LMAX Digital, and Mercer concedes that having platforms provide custody services is not necessarily ideal from a market structure perspective. However, he quickly adds: If you look at LMAX Exchange’s business model I’ve always been regulated as a broker-dealer and I’ve alway been regulated as an MTF and there’s Chinese Walls between the two.
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XTX: Last Look Defense is “Nonsense”

Jeremy Smart, head of distribution at XTX Markets, is critical of arguments that pre-hedging in the last look window enables FX market markets to keep quoting prices, even in difficult market conditions.  “The reality is that’s a nonsense. The basis on which a price is being made should be clear between a liquidity provider and the consumer. Now it’s not enough for me as an LP to turn around and say sometimes I’m a principle and sometimes I’m agent. “If you’re agent, charge a fee and be clear that you’re passing on the exact fill that you got in the market to the customer, but do that before the transaction, not selectively transaction by transaction. So there needs to be much more clarity around that,” he says.
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Using Data to Generate Alpha Signals

Charles Ellis, a trader and quantitative strategist at Mediolanum Asset Management, explains how data can be used to help generate alpha signals. The first thing that Ellis points out is how trading firms can most effectively use data is dependent on their investment process and the type of research questions they are trying to use the data to answer. For starters, he says, firms need to consider what investment time frame they are working towards. “Then you have to ask which of these time frames can we add the most value to? What data do we have access to? And then it goes into what sort of questions can we answer using this data over these time frames?” comments Ellis.  
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The Need for a Better FX Benchmark

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.
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Combining Currency Hedging with Alpha Generation

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.”
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