With Mikkel Thorup, CIO and founding partner at Capricorn

First Published: e-Forex Magazine 33 / Tradertalk / October, 2008

Mikkel, you've been an investment professional for over 15 years. What prompted you to form the Capricorn group in 1998 and subsequently launch Capricorn Asset Management (CAM)?

I was a proprietary trader for Smith Barney working from the Geneva office when I decided to go on my own and form Capricorn.  I know I was not the first ‘ex-prop trader’ with a well performing strategy wanting to start his own hedge fund, but I knew that I needed to find someone to ‘seed’ the fund.  As it happened, the prop desk also serviced a number of the banks’ HNW clients which I had developed quite a close relationship with.  It was two of these clients that offered to back me if I did go on my own, so I suppose you can say that they prompted me to form Capricorn.

How has Capricorn as a company evolved since the launch in 1999 ?

Things have evolved a lot since 1999, both in terms of Capricorn as a business as well as the fx market as a whole. I started out as a one man operation and ran the business like that for 2 years. I however realized that doing the trading, marketing, administration and many other things was too much and focus was not there to do every job 100%, therefore the organization gradually has grown since then. Today we are a team of 4, myself as CIO, Mike Rasmussen, Partner and COO, Martin Zoller, Compliance & William Sternou, Head of sales.

We run 3 trading strategies covering different time frames, as well as a external multi manager strategy which was launched in cooperation with a US fund which is already a client of ours. Our combined asset under management are currently just under 300 million USD across the strategies in managed account and fund formats, and our clients include corporate treasuries, fund of funds and HNW individuals.

With Mikkel Thorup, CIO and founding partner at Capricorn

Do you see increasing investment opportunities in the currency markets despite the current turmoil in other markets and why do you believe currency management should be part of an investment portfolio?

I believe there will always be investment opportunities in trading currencies, mainly because of the inherent inefficiencies of the marketplace.  As long as these inefficiencies continue, in my opinion a skilled trader should be able to generate risk-adjusted returns over time regardless of the situation in other markets.  For this reason I believe that every investment portfolio should have an ‘active currency’ component seeking additional returns.  Empirical evidence has suggested a low correlation between currency strategies and other asset classes, and this simply strengthens the argument for currency management for me.  However in my judgement, increasing investment opportunities in the currency market will only prevail by introducing unique strategies and ideas.  The marketplace is vast and deep enough for skilled managers to develop alpha seeking strategies that truly add value, while the ‘copycat’ funds are unlikely to gain any traction.

What are your main day to day responsibilities at CAM?

As CIO of Capricorn my main day to day responsibilities is of course trading related, primarily managing the risk of existing trades and also looking for the next trading opportunity.  We have three internal strategies that I am responsible for as well as two external strategies that we advise on.  The three Capricorn strategies share the same components, the currency majors, however the process and time horizon of the investment differs.  Our Short-term program is discretionary by category and market neutral eighty percent of the time, so when I analyse the markets on a daily basis it is primarily to determine trading levels.  If a position is taken, ‘stops’ are automatically placed with the brokers and this reduces my requirement to actively manage the risk.  Our Medium-Term and Long-Term programs on the other hand are fully exposed but with a very low turnover, so even though both programs have built-in risk strategies I actively manage the risk daily.

Apart from the trading, I am involved with quantitative analysis for selection of managers for our emerging multi manager strategy, as well as having ongoing dialogue with potential as well as existing clients together with COO & partner Mike Rasmussen. 

Can you elaborate on the currency programs Capricorn currently offers and how have you tailored your investment vehicles to assist investors to participate in your strategies?

The first program that I developed was the Short-term strategy that was launched in January 1999.  This is our flagship program in terms of the long trackrecord and annualized returns..  The program is currently available only as a managed account as it is the preferred investment vehicle of our clients.  Institutional investors such as Fund-of-Funds, Banks and Corporate Treasuries approve the transparency and the ability to notionally fund the investment.  The strategy has a very low margin-to-equity ratio and therefore the managed account format is extremely cash efficient.  The Medium-term strategy was launched in February 2007, utilising a long-options strategy to capitalise on the broader intra-month market moves.  This program is available to investors as a managed account as well as an Cayman offshore fund.  The fund format was created as a leveraged vehicle for our non-US high net worth clients.  Our most recent strategy is our Long-term program that was first introduced April this year, developed as a ‘carry trade’ strategy with a specialised arbitrage component to reduce risk.  This strategy is only available as a fund as we target clients seeking an investment opportunity they can passively managed because it is administered and audited professionally.

With Mikkel Thorup, CIO and founding partner at Capricorn

What sort of daily trading volume does Capricorn undertake and how much of that is conducted electronically?

Approx. 70% of our average 150 Mill USD daily volume is done electronically, using single and multi bank platforms. We find that entering trades are best done via electronic means, but with regards to working orders such as limits, stops and oco’s we tend to place them via phone. The reason for this is that we want to be absolutely sure that the orders are working. We don’t want to take the risk that systems should break down and us then being unsure if the orders are in or not. We also execute reasonable volumes in OTC options and these trades are only placed via phone, as ecommerce platforms for options does not seem to be as competitive with pricing as Spot FX platforms are today. This will presumably change in the not too distant future.

Do you prefer to build and maintain your own e-tools and trading hardware infrastructure?

Due to the size of our company we outsource our e-tools and trading hardware infrastructure to professional companies.  There are a tremendous amount of resources made available to managers such as ourselves today, and specific requirements can be tailored to our needs.

Do you test strategies in a simulated or live environment and how do you monitor their performance?

When we develop ideas for new strategies it is back-tested in a simulated environment.  New strategies usually take six to nine months to develop and are normally back-tested with two to three years of historical data .  Once we are confident in the strategy’s ability to create risk-adjusted returns it is launched in a live environment so actual performance can be monitored and a track record created.  The size of the launched program varies on how much we are able to raise for it, and how much seed capital we can put to work ourselves and by no means reflects the confidence we have in the strategy.  Our Short-term program was launched in 1999 with $350K about half the amount of our Long-term program, while the Medium-term program was originally seeded with $5M.

How do you approach technical analysis and how important is it in helping you identify new trading opportunities?

As a market technician I strongly believe in identifying price patterns and market trends when seeking trading opportunities.  I would describe my approach to technical analysis as being mechanical in my methodology while still maintaining a discretionary view.  To explain this in more detail, I use technical analysis as a tool to identify trading opportunities however my approach to trading is to have a robust methodology or set of rules that I do not deviate from.  My views to trading using technical analysis is not to attempt to predict future market patterns, but to instead react or respond to current market movements.  Therefore, I will have an opinion on direction and market sentiment, but I will still execute trades and place stops against technical levels.  Then again as I mentioned earlier, identifying a new trading opportunity does not always mean that it is executed.  My discretion comes into play here.

With Mikkel Thorup, CIO and founding partner at Capricorn

The focus of Capricorn is on Best Execution. The trading platform performance of your Prime Brokers will therefore be of paramount importance. How do you go about measuring this?

Yes, Capricorn does place strong emphasis on ‘Best Execution’ and this is not because we are high frequency traders and poor execution would  have a huge negative on performance.  As I said before we are fairly low frequency traders but we understand that inefficient spreads and ‘slippage’ comes straight out of our clients returns.  We do not have a system that measures the efficiency of the trading platforms we use from our Prime Brokers and secondary liquidity providers, instead we have an overview of each platform and execute on ‘Best Price’.  Also by dealing with the major single-bank liquidity providers such as Deutsche and UBS, as well as multi-bank providers we do have access to tight spreads.

A main condition for us when entering or exiting trades, is that we need to have assurance that our full block trade will be filled, partial fills does not work well for our trading strategies and operations. One of our priorities in the near future is to establish our own GUI interface that our liquidity providers feed into to automate our ‘Best Pricing’ practice, thereby making it easier to view aggregated liquidity, as well making it more smooth from an operational perspective.

You currently only trade high liquid currencies that are executed manually. Why do you have a preference for this and would you consider expanding your operations to include the use of algorithmic or high frequency trading techniques?

Firstly, our focus on trading G10 currencies only, is based on the simple conclusion that we only want to be active in the most liquid markets. When trading bigger size it is extremely important to us that we are able to get in or out whenever we need to without any significant slippage. I believe that there is a lot of talk from market participants about FX being the biggest market in the world, however, if you suddenly are trading more exotic crosses you will see that that liquidity everybody talks about is not really there at times. We have a commitment to our clients, and that is providing them very flexible liquidity when allocating and at the same time we commit to running very tight risk management. There is simply too much risk of liquidity drying up outside of G10 crosses.

With regards to algorithmic trading this is a very hot topic these days and we do extensive research into this area. However we have not really found anything that works for us yet. The main reason for this is that we tend to have a more old school approach to trading, and that means that we still use discretion in most trading decisions and prefer to have visual contact with the market, ie being in front of the screen when moves occur. This way we believe we can filter out noise using our experience and react to new scenarios. We have heard that this also can be programmed, however we have not found out of that recipe yet!

With Mikkel Thorup, CIO and founding partner at Capricorn

Achieving risk-adjusted returns consistently is never easy. What key attributes do you think successful currency managers need to have?

I am definitely an advocate of the ‘Turtle’ philosophy to successful trading; having confidence, consistency and discipline.  So even though I technically analyse market opportunities daily, our trade frequency is comparatively low due to our discretionary view and methodology.  A clearly defined methodology with a robust risk control policy is crucial for a currency manager to be successful in the long term.  Creating a unique strategy that is able to achieve risk-adjusted returns is half the battle, being able to maintain your discipline during all market conditions and follow your rules to trading is the other half.  My personal view is that the ability to be selective over the identified ‘alpha’ seeking opportunities is more important than following what the charts indicate.  I have seen too many occasions when even professional managers have given back their profits and more by over-trading.

What vision do you have for developing your business in the future and how important do you think e-commerce and trading technology will be in helping you add value to your clients' portfolios?

We believe that we already today have a very strong organization that can cater to institutional investor needs. When dealing with institutional allocations it is paramount to have all such structures in place, without that you don’t get the chance for these types of allocations. Otherwise the only addition to our team we are considering is to have a trader that can help with execution and monitoring positions.  Going forward our focus is 100% on research into new models or strategies, both covering the potential for algo trading but also looking into expanding our coverage of markets.  Our main focus will always be developed markets, but when liquidity and interest will increase in emerging markets we will clearly have a look to see if we can implement these into our existing strategies or develop new ones. Trading technology will continue to grow and we will have a close eye on all new offerings in this space, although I believe in a consolidation in the FX ecommerce space is eminent, there will be coming great new improvement to the FX etrading space in the years to come.