Thomas, please give us a brief introduction of Quaesta Capital and its main business activities.
Quaesta Capital was founded in early 2005. We are an independent alternative asset manager with offices in Pfäffikon/Switzerland and Frankfurt/Germany.
Quaesta Capital AG in Switzerland fully focuses on Foreign Exchange. With the three business lines FX Alpha programs, FX risk management and FX advisory services we cover the full spectrum of active and passive currency investment management. We manage one single FX volatility strategy (v-Pro) and an FX fund-of-fund (FX-MMP).
Our sister company, Quaesta Capital GmbH in Germany, focuses on the management of systematic and discretionary absolute return strategies. Its flag-ship programs are vTrader, a fully systematic FX single strategy, and Bond Global Select (BGS), a diversified fixed income/global macro program.
Who are the key people involved in running the company and what are their main day to day responsibilities?
In my function as the CEO of Quaesta Capital AG in Switzerland I am overseeing the different business lines, with an additional specific focus on risk control and marketing activities. Christian von Strachwitz is CIO of the Swiss branch and in charge of the German entity.
Our currency fund-of-fund business is headed by Pablo Frei. His main activity is due diligence and the ongoing monitoring of the whole currency fund’s investment universe plus the portfolio management of our FX multi-manager program.
Damian Zihlmann and Harald Hild are the two portfolio managers of our single FX volatility strategy v-Pro. They are responsible for the program’s strategy and the related portfolio management activities.
Cengiz Temel is in charge of FX services at Quaesta Capital. He devises and manages tailor-made currency overlay/risk management solutions for our clients.
The programs from our German colleagues, vTrader and Bond Global Select, are managed by the team around Christian von Strachwitz. The main activities involved in the vTrader program are managed by Henning Heppner.
What types of client are attracted to the investment and FX services you provide?
Our customer base consists of Pension funds, Family offices, Sovereign Wealth Funds, hedge funds, banks and corporate clients. Quaesta Capital also has wealthy private investors. Our FX investors are looking for attractive alternative investments with low correlation to traditional asset classes. They greatly appreciate the advantages of high liquidity and full transparency which our programs offer.
FX services clients on the other hand need solutions for their specific FX problems. Typically, they wish to hedge the FX exposure of their income or assets. In that field we do also have corporate clients, companies who have significant FX exposures resulting from their business activity.
What currency Alpha programs does Quaesta Capital run? Please give a brief overview of them.
Quaesta Capital currently runs three FX Alpha programs. The Foreign Exchange Multi-Manager Program (FX-MMP) is a diversified pure FX fund of funds, investing into the best currency managers globally. The goal of the program is to deliver robust, sustainable and risk-adjusted returns with low correlation to traditional asset classes. FX-MMP is the result of an extensive and thorough systematic due diligence selection process of the whole FX single manager universe. The portfolio is optimised and diversified over three dimensions - style, currency and time horizon - and it is tactically rebalanced on a monthly basis. The portfolio typically consists of 8 to 12 selected single currency managers.
As a single strategy, we offer our FX volatility program v-Pro. v-Pro is a long/short FX volatility program. Four different volatility strategies are adopted in order to achieve stable returns in various market environments. v-Pro uses a blended approach: Profitable trades are identified through quantitative analysis of the volatility and spot markets combined with discretionary filtering through our portfolio management team. Investments are mainly done in highly liquid major currencies, completed by opportunity trades in emerging currencies. v-Pro is offered as a Luxembourg based SICAV-SIF Investment Fund and as managed account.
Our second single FX strategy is the vTrader FX program. vTrader is a fully systematic strategy based on algorithmic trading. vTrader technology uses time series approaches which are analysed and tested with Computational Intelligence methods. In detail vTrader develops evolutionary algorithms which replicate mechanisms of a natural evolution by a computer program. vTrader is offered as managed account and invests into the highly liquid major currencies.
How many FX programs are you currently monitoring in your database?
With roughly 200 pure FX programs in our proprietary database we believe we are one of the only asset managers that track almost every professional FX program globally available. We stay in direct contact with every manager and store their data on a real-time basis. Of the 200, less than 100 are investment grade and just about 30 programs are part of our current short list. Our multi-manager program usually consists of eight to twelve single managers with the aim of giving investors access to the best team of global FX managers.
Does “big is beautiful” also work when thinking of selecting the best FX managers?
Unfortunately, not at all. We have been and continue to track several programs from global institutions, where some have stopped because of poor returns. Most of the existing ones are at best, average return generators. Looking only at the presentation and strategy description perspectives one would expect much more than average results from such programs. Facing the strong headwinds of earning money by investing in FX some of the big institutions completely gave up offering an internally managed FX program. Instead of offering internal programs they have switched over to offer clients access to external FX managers or FX manager indices. We are currently working with institutions on projects that involve launching FX manager based style indices and tailor made portfolios.
Generally, taking a closer look at “almost too good to be true” returns often discloses the rationale behind them – such as using simulated returns which have not much to do with the real world. Therefore figuring out the authenticity of any FX strategy is the first task when looking at a new strategy. The better it looks the more cautious one should be. Earning money with FX is definitely not an easy task!
Is it true that in the long run only systematic FX strategies are able to deliver sustainable returns since emotions negatively impact FX returns?
Looking in our database the number of discretionary and systematic strategies is almost balanced. There is no clear picture about the correlation of being successful and applying a systematic or discretionary strategy. Much more important in delivering attractive long term returns is to have sound risk management. Often managers have a strong idea generation process but are weak on managing risks. We have seen many managers that have failed on managing risk or re-entering the market on time after suffering a draw down. In the end a trader or a system has to show its ability to earn and preserve money over various market regimes and this they have to prove on a day to day basis, continually. Being successful over a period of time or in a specific market regime doesn’t at all mean you will earn money over the long run. For example look at the Carry trades which were very successful over a long period of time before facing severe losses throughout the financial crisis. The right timing is crucial, not least in the selection of single FX programs.
If you are looking at your database and the six years of experience of managing an FX multi-manager program, which strategy do you think is the most successful?
As mentioned before there is no strategy or approach that guarantees sustainable attractive returns. Every strategy has its pros and cons – in order to be successful it needs the combination of a proper idea generation and a sound risk management. Additionally, the success of a strategy is often depending on the general market environment. How can a momentum based strategy deliver returns if markets are quiet and volatility is low? In the fund of funds we therefore try to tactically over and underweight certain trading styles according to our view of the current market environment.
What steps should investors be taking when they go about choosing a currency manager? What are important elements in their decision making process?
In our view there are at least five questions the investor should ask:
1. What do I expect from adding an FX program to my portfolio? (diversification, return, liquidity, cash management)?
2. Do I feel comfortable having all FX exposure with just one manager or do I prefer to limit single manager risk by investing in multiple managers?
3. Does the program have an attractive audited track record that matches my expectations?
4. Does the manager have the set up to manage my money properly?
5. Do I believe in the manager’s ability to earn money on a sustainable basis?
How do you approach the selection process as part of your internal FX multi-manager program?
Basically ask ourselves these same 5 questions. First, we start with a thorough systematic qualitative and quantitative due diligence process. We want to know the people who are responsible for the strategy and monitor them for an extended period to make sure they are able to fulfill our expectations. In the end we invest into people and therefore want to know them personally, see their offices and talk to them. To back our impressions we start with a small allocation which allows us to track a manager’s positions and risk management. As we only invest through managed accounts we get the full transparency needed. As our FX-MMP is a diversified multi-manager program we use a systematic process of constructing our portfolio accordingly. The final call whether a manager gets a substantial allocation is taken by our investment committee which meets, at least, on a monthly basis. Over the past few years the core portfolio has been very stable meaning that most managers have been part of the portfolio for a long period.
What strategies are used to make up the Quaesta v-Pro FX Volatility Program?
v-Pro is a long/short FX volatility program. Four different volatility strategies are adopted in order to achieve stable returns in various market environments.
Relative and absolute value strategies
This strategy takes advantage of the shape of volatility surfaces. Spreads in various volatility matrixes and currencies are traded. Also volatility is bought or sold outright if prices do not properly reflect market environment.
Time decay strategies
This strategy takes positions to earn time decay, usually via exotic options with a limited downside. The portfolio is constructed to perform in sideways markets.
Carry trades via options
This strategy enters into positions in carry currencies with a clear risk/return profile. Again we exclusively use option strategies which show no bad exit risks. As a result this strategy earns the benefits of interest rate differentials and skewed volatility curves with limited risk involved.
This strategy takes long only positions in options via low delta contracts to profit from directional moves in spot. Risk is limited to the premium paid.
How would you describe your philosophy and approach to the currency investment process?
We use a blended approach on our trade idea generation: Potential profitable trades are identified through quantitative analysis of the volatility and spot markets combined with discretionary filtering by the portfolio managers.
What makes the v-Pro strategy an interesting strategy for investors?
v-Pro focuses on volatility trading. 95% of the universe of currency programs just focuses on directional trading, hence making a bet whether a certain currency pair moves up or down. Hence v-Pro offers investors an additional dimension of diversification which they cannot achieve when allocating into different directional FX strategies. We view this as the main reason for the significant demand from institutional investors which we have experienced throughout the last two years.
Do your specialists have any bias towards short or long volatility?
Generally the fund has rather a net long volatility position than a short position. However in certain environments when we regard implied volatilities as too high, we may also run short volatility positions, both on gamma and vega levels. When we run short positions on these ‘greeks’ we typically run them via the use of exotic options in order to limit our maximal downside risk. Via that way that we buy options, the maximum loss is limited to the paid options premium.
The vTrader FX program is actively managed by Quaesta as a tailor made portfolio. What are the key objectives of this strategy?
vTrader FX is an actively managed systematic technological trading strategy with a live track record going back to September 2006. Investors use Quaesta´s vTrader FX strategy as FX Overlay, direct investments or as part of an actively managed currency hedging strategy for FX exposures. For all investments vTrader FX makes use of cash or forwards within short-, medium- and long-term investment horizons. Building on the principle of capital preservation, vTrader FX takes directional and market-neutral positions. To guarantee liquidity vTrader FX invests only in high liquid G10 currencies and at the moment into 11 specific currency pairs.
What is vTrader technology based upon and where was it developed?
The vTrader technology is based on time series which are analysed and tested with Computational Intelligence methods. Specifically, vTrader develops evolutionary algorithms which replicate mechanisms of natural evolution by a computer program. Thus expert knowledge is acquired and complex tasks can be successfully solved which often cannot be handled by traditional optimization techniques.
In short, vTrader technology simulates a trading floor with virtual traders. The trader’s tasks are to analyse their specific market, to identify profitable investment opportunities and to generate financial expert know-how. The algorithms are no black box and are human readable.
vTrader has been developed and is continuously enhanced by Dortmund Intelligence Project GmbH (DIP) and the management of Quaesta Capital GmbH. DIP was founded by leading scientists at the University of Dortmund in cooperation with experts from the asset management industry. This company focuses on high technology solutions for financial markets. Dortmund Intelligence received the Technology Development Award of the state of Northrhine-Westfalia and of the German Federal Ministry of Education and Research in 2009.
What Risk Management frameworks do you run with vTrader?
The risk management for the vTrader technology is based on independent strategies for each currency pair. Before entering a position, a stop-loss in the sense of price and time is set for each currency pair. Stop-loss and profit targets are continuously monitored. As soon as an investment exhibits a gain and specific targets are reached, the risk is reduced by adjusting the stop-loss. With high confidence vTrader will not sustain a daily loss that is larger than a fraction of the total risk. On portfolio view we have an overall weekly portfolio max limit. The vTrader FX strategy is based on an intra-week horizon, this means we don´t hold market positions over a weekend. Overnight we place under all circumstances stop –loss and profit-target orders for all market positions.
Furthermore we offer full transparency for the vTrader strategy as our investors get access to all portfolio positions and risk parameters.
What back-testing methodologies does Quaesta employ to confirm that your strategies remain relevant to the long term trading goals and performance criteria of the firm?
All algorithms are tested with short-, mid- and long-term data series as well as in in-sample and out-of-sample periods to analyse the returns and the behaviour of each algorithm under different circumstances before we use these as live market signals.
If an algorithm for a currency pair is successful during the testing period, we use that algorithm for live trading. All live trading algorithms are monitored regarding returns and behaviour. We use algorithms for live trading as long as the minimum requirements are fulfilled. If this isn´t the case anymore, we generate new and fresh algorithms first for testing and at the end for live trading.
In what ways do you undertake a research agenda to help improve the design of new program strategies and the ongoing enhancement of your existing program processes?
Since inception of our vTrader FX program in 2006 we continue to optimize and enhance our algorithm machine with respect to changing market environments. That happens for the whole program as well as on the level of each currency pair as the changes of each of them can be fundamental. To improve vTrader FX we work close together with the specialists of DIP to identify the best solutions for a successful running systematic technical algorithm machine.
In additional to your investment activities what other FX services does the firm also provide?
As an currency expert we provide our clients with the following FX services:
FX Risk Management. Here the focus is on hedging optimally the FX risk of an investor’s portfolio. This can involve tasks such as aggregation of the FX risk, determining the optimal hedge ratio, implementing an efficient cash flow management and assuring best-execution.
FX Transaction Cost Analysis. Here the focus lies in revealing the true costs of executing FX transactions and setting-up an efficient execution platform via a multibank or prime brokerage set-up. This allows the client to achieve full transparency on the FX transactions.
FX Execution. Here we support our clients with our know-how and nearness to the fx market to trade at best prices.
What trading platforms do you use and what factors influenced that choice?
We currently use the common trading platforms of the banks we work with and for some clients we make use of multi-bank trading platforms. In our FX services activity it depends on the client’s willingness to opening up the number of execution banks to use. Sometimes this may be a rather challenging task.
How important do you think e-trading tools and technologies will become for leading FX investment management firms, in helping them to better manage risk, more successfully meet their investment objectives and achieve competitive advantages?
Good solutions on the pricing, risk management and risk control area are a must if you want to attract institutional investors. On the execution/pricing area we use external tools such as banks trading platforms and multi-bank trading platforms. Of course, there will be further improvements taking place in that area, but overall I think we are already at quite good levels of efficiency.
However, in other fields we have seen the need to develop in-house tools. On the risk management / risk control area we have put in a great level of efforts to develop in-house application tools which help us there. This is crucial in order to fulfil all the needs our institutional investors request from us. Currently we’ve got two internal applications we use. COPS (Currency Overlay portfolio suite) helps us on the FX risk management activity to execute pretty much all the processes with the assistance of this application. FX execution via this application and an immediate adjustment of the client’s hedge ratio after trade execution allows us to have real-time positioning/risk management in this area.
The second internal application we use is MTS (Management Tool Suite), which allows us an automatic reconciliation, positioning, risk management & risk control for our FX single strategies. Managing several programs (funds, managed accounts) with the same strategies for our clients requires the use of sophisticated IT-applications. This way trades are automatically split to the various programs, an automatic reconciliation between execution bank / prime broker and us guarantees that every trade gets settled correctly and is immediately inserted for risk management/control purposes.
What new products and services will Quaesta be exploring as part of your continuing efforts to widen the range of FX advisory and investment solutions you make available to clients?
Currently we see a great appetite by banks to widen their offering with liquid investment products. As such the use of FX related products has become quite fashionable. In our capacity as a fund-of-fund manager who knows the world of FX managers very well we are working together with them to build/develop such indices.
On the pure FX services area we have begun offering specific FX risk management services to industrial companies. Overall the need for a sophisticated approach on the FX exposures has increased substantially, or looking at it another way, the awareness of this risk has dramatically risen due to the substantial turmoil in the FX markets we have experienced over the course of the last few years.