Paul you have more than 25 years of experience in FX, including being Global Head of Foreign Exchange for a major multi-national bank. Are you as enthusiastic today about currency trading as you were when you first started your career?
Definitely –more so than ever. The events of the last few months have served to remind us that currency does have a large part to play in macro economic processes. As such it is therefore a legitimate and growing asset class. We have seen a step change in currency activity and volatility since the dog days of 2006/ early 2007 where popular mythology had it that all governments were following similar inflation targeting policies, and with globalisation this implied that currencies would move gradually and remorselessly based upon interest differentials- the so called carry trade. This theory and the strategies it promulgated has been totally and appropriately exploded.
We are back to the days where currencies are used much more specifically as a policy tool and act very differently in different countries. What that means for us as managers is that we are back to the pleasure of waking up every day to an environment rich in opportunities and being able to do something about it.
You set up C~View in 1996 to offer investors what you describe as a unique position-based approach to Forex trading. What does that entail?
C-View attempts to capture short to medium- term price trends. It runs a diversified portfolio of currencies, long and short, sometimes for direct alpha and sometimes for yield and the dampening effect on volatility. It supplements these activities with short- term tactical trading. The underlying portfolio is constructed once a quarter. The Trading Advisors determine which currencies are suitable for inclusion based upon underlying economic and political positive and negative fundamentals, the yield available, the liquidity and volatility. The yield pick-up and potential for appreciation allow an assessment of the risk/reward to be made. Appropriate levels for take profits and stop-losses are set. Once the currency mix is established, positions are built up tactically- i.e. on minor price corrections. The time horizon for a view is 1 day to 3 months.
C-View offers both a Currency Managed Account Program and Emerging and Minor Currency Program . What sort of investors are you targeting with these products?
We primarily target large institutional investors and Currency and CTA Fund of Funds. Our approach is based upon a particular investment philosophy that seeks to deliver reasonable returns within a limited risk framework with a scrupulous attention to the preservation of client capital . As such we are always looking for reasonable risk adjusted return strategies rather that necessarily solely seeking high risk one-off portfolio gains. Unsurprisingly therefore with such a philosophy our investors tend to be those who prefer a volatility conservative approach- so pension funds, large institutional investors are our primary investors . Of course the ability to notionalise and margin accounts does still add an appeal to more risk seeking investors who can take our return stream and leverage it further.The Emerging and Minor Currency Program is for those investors seeking to capitalise on a somewhat higher risk return profile in the more minor currencies, but follows the same broad conservative approach.
What types of instruments do you normally trade?
We trade spot forward and outright OTC foreign Exchange and NDF’s ( Non Deliverable Forwards) in applicable currencies and currency Options. The main Managed Account Program trades a total of 30 currencies and the Emerging and Minor Currency Program an additional 10 currencies with longer tenors and second generation currency options
What's the average length of time you hold your positions?
The portfolio component of our strategies will hold positions up to three months . The short term trading is focused on much shorter timeframes – intraday to up to two days and thus has a much shorter holding period. For both parts of our process the holding period is defined by objectives rather than by a specific desire to hold positions indefinitely. In aggregate our average holding period for portfolio positions is around seven business days, as we tend to add and subtract to them as markets progress, so that part or all of the positions may be retired and re-acquired.
In what ways do you supplement your portfolio strategy by opportunistic trading to improve returns?
We supplement the portfolio strategy with shorter term, opportunistic trading in the major currencies. This is not only when currencies are fluctuating within a pre-determined trading range, but may also be when a particular short-term trend is identified. We occasionally trade the minor currencies short term when range characteristics similar to the majors are identified, but this depends on the prevailing liquidity and spread of price. Short term tactical strategies incorporating rigorous parameters are based upon market observation.
Unsurprisingly fundamental influences have little to do with short term movements in foreign exchange. Our short term strategies and trading are based upon flow information, economic and political events and short term technical and quantitative influences upon the market, and we follow all of these closely.
Do you test and re-work your trading methodologies and strategies on a regular basis?
Our processes are continually evolving. At the core are simple disciplines in terms of minimum risk reward criteria that generate specific objectives and constraints for each exposure and portfolio. Within this framework we are always looking at different approaches and timeframes and cross currency relationships as we seek to maximise returns and develop further our understanding of FX markets. In the last couple of years we have put much endeavour into the influence of other markets , notably commodities, equity and bond markets on Foreign Exchange.
How often are your underlying portfolios constructed?
Our underlying views gestate into portfolio exposures that are constructed once a quarter. The reason for this is twofold. Firstly, without sounding too facile, a month is too short and a year too long,.Secondly and more specifically we find that there is a tendency for currencies, both individually and in aggregate, to have strong moves which last through a two to four month period. Then what typically occurs is a period of consolidation, and thereafter potentially some reversal. It is therefore the rhythm of markets and trading opportunities within that which determines the frequency of our portfolio strategy reviews.
With regard to currency position planning, what factors influence which currencies are suitable for inclusion and what sort of modifiers are used to determine the maximum position you will take in any one currency?
Fundamentals first. Our process is one that looks at rate of pace of change of underlying fundamentals and their effect upon a currency value more than a naïve concentration on absolute numbers. Also included is a focus upon relative value exposures within regions where we frequently find the best risk/ reward opportunities. Whilst we review and analyse thirty currencies we do not feel compelled to have a view on all of them,only in those where we see some opportunity or anomaly. Thereafter maximum position is determined by liquidity, volatility and the predictability of any individual currency. Of these liquidity, the current size of markets and historical analysis of market liquidity in time of previous stress, being the primary positional constraint.
Once the currency mix is established how do you go about building up positions?
For each component part of the portfolio C-View has predetermined entry and exit levels. These are carefully monitored and, as an additional safeguard, stop-loss, take-profit and call levels are placed with counterparty banks and brokers. Positions are established tactically buying into dips and selling into extended rallies. For some part of our strategies this means that we can frequently retire gains and look to re-enter at better levels. A side benefit of this is that as currencies, both individually and in aggregate actually spend long periods consolidating rather than trending, it allows us to continue to deliver some returns in the frequent periods of time when there is relatively little net movement.
In what ways are the use of currency options helpful to you?
Currency options are used sparingly for two purposes. Vanilla options are used to prolong a strategy, which has reached its cash objective, or to provide protection for a potentially volatile position. Both vanilla and second-generation options are used to express a view within a framework of limited risk. Strategies are employed that provide pre-determined maximum profit and loss values and are used so that no option strategy undertaken has unlimited downside The recent substantive spike in option volatilities as a result of market turbulence has for the interim lessened their appeal as hedging tools and our current option activity is relatively low.
How do you go about analysing market data for ways to improve execution?
In two ways, firstly we review data regarding size of market and daily turnover which we received from a number of banks that we execute with. From this we are always looking at possibilities to include currencies in both parts of our processes - if markets become liquid enough and the spread on price narrows we are able to trade them tactically on a short term basis, as well as include them in our underlying portfolios. Secondly we review our activity over the single bank platforms and those platforms where we aggregate price in order to assist in determining the best execution avenue.
Where have you focused your efforts to improve your trading technology infrastructure to cater for the changing nature of the FX market?
The C-View Currency Program is fundamentally-driven and discretionary. However, we utilise many aspects of the e-Forex world in common with quant-driven FX firms as we work to minimise spreads and increase our efficiency with straight-through processing. In particular, we have brought most of our liquidity provision into an aggregator, allowing us to see the best bid/offer available at any given time. This has increased the possibilities in short-term endeavours in a number of minor currencies that had previously not been open to short-term trading because of prohibitive spreads.
The portfolio managers and execution team are now able to trade a larger number of currencies at any one time as we can set up trading strategies automatically that sell breaks of levels, trail stops etc. This allows us to spend more time on analysing markets and less time on execution. As a result of our currency diversification we trade a large number of relatively small trades and these are then split into a number of different managed accounts, so trading strategy is highly dependent on electronic trading and settlement. Our trading infrastructure is developed by third parties but we have considerable involvement in its progress. In that we are spoilt for choice and believe that these is no need to ‘reinvent the wheel’ with internal systems
What risk management facilities do you maintain and where do you focus your risk analysis and controls?
As we have a diversified approach incorporating medium term and short term strategies our risk management facilities reflect this. However overarching them all are simple nominal constraints per exposure and then daily and monthly stop loss levels for each subset portfolio and short term activity. We are able in real time to view and analyse our gross exposure by currency across all strategies, and we risk manage and feed this information into a VAR engine. I would emphasise one aspect of this. Our primary constraint is nominal limits and we use VAR to look at correlations and concentrations of risk, rather than the other way around. We do not believe that VAR in isolation is necessarily an appropriate tool for FX risk management.
Do you see Algorithmic trading having a significant impact on currency management and what benefits could it bring?
There appear to have been two components to the rise in Algorithmic trading after its much trumpeted application to the FX market. The first seemed to enable an ability, if the right tools were built, to trade latency. This appears to us to be an unsustainable activity which seeks to take advantage of the market-making banks in particular. We applaud the fact that the banks appear to have developed much better processes to identify this sort of behaviour and to turn off facilities if necessary. The second and far more legitimate Algorithmic activities have include processes which we see adding more liquidity by non-traditional sources and the application of referral of price movement in other markets to currency prices and vice-versa. Both these appear to us to substantive additions to the market. The benefits can include more liquidity and new and different manager styles which allows investors to have a wider range of currency strategies in their portfolios.
The ability to trade on aggregated liquidity accessed by algorithmic tools now plays a key part in helping many managers achieve best execution. Is this also true for C-View?
It is the fragmented nature of price provision that underlies the advantages of aggregation of liquidity. Liquidity providers have become more sophisticated in terms of pricing against their position and aggregation allows us to see which banks are better bid or offered at any one time. This is also advantageous for the banks as we deal on the shaded prices so they do not need to cross the spread. The major issue that we have had to address is price aggregation in one place so that we are not having to dive from one platform to another to access the best bid or the best offer , hence our use a price aggregating platform, at least for spot FX. In terms of connectivity, we now have direct API connections to most of our liquidity providers and we have worked with our technology providers to reduce the problems associated with latent prices. We constantly monitor feeds and can deal around stale prices.
Do you use algorithms mainly to provide a disciplined approach to scaling in positions/trailing stops/exploiting ranges etc or to analyse the market to help determine better levels to enter or exit trades?
Yes, we use algorithms to scale into and out of positions and this allow us to electronically automate disciplined risk structures around our strategies. Frankly algorithms is a slightly pompous word for what we do- its more a case of having multiple defined entry and exit and next step strategies associated with our trading and being able to automatically upload those orders into banks platforms. We are surprised how relatively few banks allow for a fairly straightforward upload of orders such as these in Excel direct into their order boards, so naturally we tend to direct our orders to those that do. We also look at other technical and quantitative process to assist us in determining better trade entry and exit levels.
Although C-View is a fundamentally-driven discretionary manager with medium-term portfolios you also look to exploit short-term opportunities. Do you see algorithms playing a role in helping you take advantage of these?
We have described our approach above. In terms of exploiting short term impulsive moves and ranges in currencies we have added some electronic automation to our processes, which allows for more discipline and refinement.
Would you consider accessing ECNs and other alternative trading platforms as a price provider to help improve execution?
Yes and No. Primarily we now have a reasonable number of our major counterparty banks already providing us with pricing, which is mostly streaming, directly through APIs. We do not really see the need for us to access those ECN’s that are doing pretty much the same things with the same banks and then redistributing it to us. In the current environment (which we believe will persist for some time) access to liquidity is the result of building strong relationships with liquidity providers, which is important now we can no longer assume stable prices. We do not want to be accessing the same liquidity twice, so we limit our use of ECN’s. The exception to this is in the area of Forward FX , outrights and NDF’s where the lack of a similar functionality for us to directly access multiple pricing in these instruments or components of them means that we look to ECN’s or other independent price combination mechanisms to achieve best execution.
Traditionally currency investors gravitated towards trend following systematic currency managers. Do think that's still true today and how important is it that they widen their investment perspectives and spread allocations amongst different managers utilising different styles and time-frames in their strategies?
The vast majority of allocations to currency managers still flow today to systematic trend following strategies but we do see that changing and evolving. There is now a wider variety of styles both discretionary and systematic and alongside this a proliferation of timeframes for different strategies. This allows for investors to have a much wider choice of managers which is positive, but at the same time presents the dilemma of which to chose and how to allocate risk between those different strategies. We see some very able investors who are very adept at selecting and blending these different styles to produce a varied a n non correlated portfolio of managers and this is a process we see developing further going forward.
Earlier this year C-View launched an Emerging and Minor Currency program. Do you continue to see significant opportunities in minor currencies and crosses or do you expect the current economic difficulties in many parts of the world to dampen investor appetite for exposures in Emerging market currency products?
It was a somewhat inauspicious year to launch an Emerging and Minor Currency program as we did not foresee the very sharp and sometime dramatic declines in a number of minor currencies. In fact we believe we are one of the few investment management firms to launch an Emerging Market program this year that is showing any positive return. There are a couple of other matters of note Firstly trading Emerging and minor currencies exclusively and not being involved in EM equities and bonds allows for both long and short strategies but most importantly for access to instant liquidity and valuation to the program. This is a fact that is utmost in the mind of some investors in these uncertain times. Secondly although we added an additional ten currencies to the thirty we trade in our standard program there have been a number of instances where those markets have become too hazardous for us to contemplate trading. We are of an age and experience that we recall former times when countries and currencies have reached a point where the authorities look at some form of capital control or other constraint to prevent further currency disturbance . We are sufficiently concerned about the unenviable prospect of being locked into situations such as these that we rapidly remove exposures in currencies where we see instances of this potentially occurring. Going forward we continue to see huge opportunity in this area partially because of the current dampening of investor appetite.
Do you believe the quest for absolute returns in currency investing is getting harder and that an understanding of market psychology coupled with use of state of the art trading technology has now become a key requisite for successful managers?
In general we perform better in more volatile markets so in that regard the recent market characteristics have presented greater opportunity. However the dramatic changes in market liquidity and the removal of some large component parts of price making facilities, by the closure or merger of banks, has changed the landscape very quickly . We consider that understanding these effects is probably, for the time being and the near future, more important than market psychology in understanding price movements. Overall the quest for delivering absolute returns in an appropriate risk reward framework is changing rapidly and requires experience as much as analytical tools. State of the art trading technology adds materially to strategy and execution development.
Has the extraordinary turbulence and volatility in global credit and stock markets given you cause for concern about the future of currency investment or made you even more excited about future opportunities within FX markets for generating alpha?
Currency Managers and CTA’s have proved themselves generally very successful in delivering returns this year in this turbulent environment. In the context of an asset class that provides instant execution, valuation and daily liquidity to investors, and which is completely transparent, we consider that the current environment and looking forward adds huge potential to currency investment as an asset class and an alpha generator.
Looking towards the future what do you see as the biggest challenges facing leading currency managers such as C-View?
From a trading and portfolio management perspective the biggest challenge is being able to respond to rapidly changing market environments and having the necessary experience and competence to do so, with the attendant technological tools to assist in that process. From an investor perspective the challenge is to find efficient ways of widening our distribution channels, ensuring that the characteristics of currency as an asset class as described in the previous question are fully appreciated.