Giovanni, how long have you been involved with the foreign exchange market and what do you particularly like about the industry?
It’s been my life for now 19 years, and holds my best job-related memories. Banque Paribas, American Express Bank, Swiss Bank Corp, UBS ... and finally JW Partners. I admit it’s the only industry I know, although I can probably say I know it extremely well. I like it’s way of thinking always mark-to-market, something made possible by its huge liquidity, and also by a natural habit to respect the market and its levels, no way out, at any given second in time you know how much you are gaining or losing, something which has been missing and creating big issues in other financial markets until the credit crunch implosion started in 2007. I think that is one of the basics of disciplined and successful trading both at professional and personal level, and if you are intelligent and open to a learning process the currency market teaches you this.
You are CEO of JW Partners, based in Milan, Italy. How would you describe the mission of the company which was founded in July 2007?
Prove that quality Foreign Exchange strategies are a basic requirement to build more efficient portfolios; satisfy investors’ needs with a unique and non correlated service. This is our mission, and we achieve it maintaining focus and quality in our daily operations and strategic decisions.
How is JW Partners structured and what are its main business activities?
We provide services mainly to institutional investors and corporates through dedicated products. JW FX Multistrategy is a fund-of-funds type portfolio, where we select the best currency management companies in the world, designed to support institutional investors to build quality currency alpha multimanager investments. JW Corporate provides corporate clients who are exposed to foreign exchange moves with a Currency Overlay consultancy and active management service. In the “single manager” strategies category JW FX Macro MT and JW FX Quant ST are proprietary currency strategies for institutional and HNWI. The above 3 classes of services are followed for research and execution by dedicated resources, and share the same operations and risk management team.
What do you see as the key strengths of your FX team?
Being fully focused, experienced, and totally independent. We have been and are consistently, 100% of the time focused on the FX market and on keeping our know how and services to the highest possible standard. We believe we still have room for improvement, and this is why we make continuous efforts on research and procedures, and on internal education of the junior human resources.
JW Partners offers currency investment products targeted at Institutional Investors, corporate and HNWI. What are clients looking for from Currency Advisors like JW Partners?
Our know-how is what clients need and ask to take advantage from the FX Market. FX responds to investors’ needs in terms of diversification and liquidity. An appropriate asset allocation needs products which guarantee real portfolio diversification, while holding positive performance potential in any scenario of the global financial markets. On the other side to protect the liquidity risk: recent events proved that it is important to allow quick redemption, and that is perfectly possible when the underlying instruments belong to a highly liquid market and are thus easy to revaluate. But having understood this, institutional investors mostly realize they lack the needed in-house knowledge to decide how to access such liquidity and diversification. One thing I’ve learnt since I was a kid is that to get to do something well you need to put a big effort on the field, studying and working a lot to achieve an excellence level. We do that in the currency market, and it’s a perfect match with institutions who do not have the time, and that is years, and today not even the possibility to make mistakes, before they can build that in house. We have lived the FX market liquidity origination from any perspective; we have a deep understanding of the currency management opportunities and risks: this puts us in a very good position to get to the real value of currency managers in terms of talent to produce consistent returns coupled with disciplined and structural risk control, and to deliver the product of our research to the institutional client after sharing their investment horizon, risk profile, and need. Need is important, as a producer of a product, of a service, we have to consistently satisfy real needs: this is not a game to which manager raises most AUM, marketing has to take one step back in the importance of this industry.
Your flagship product, JW FX Multistrategy is available through several investment solutions to Institutional Investors. In what ways did you design this product to satisfy investors needs?
Institutional clients can access JW FX Multistrategy through various investment solutions: it can be delivered as a fund-of-funds selection advisory, or as a managed account, or again packaged, by our partner custody or issuer primary banks, to match the clients’ need as a Principal Protected Note (CPPI and others), Total Return Swap, Certificate, Sub-Advisory agreement, Notional/Unfunded allocation (credit limit/margin). Whichever the solution chosen, we as JW care about the quality of the underlying, and support the client in accessing it at the best possible fees, as any inefficiency in the structure would hit also our performance.
How do you go about achieving maximum portfolio diversification within the JW FX Multistrategy?
The most important part in the investment process is the investment managers research. That is the step which allows us to achieve the needed “deep understanding”; when we have put a currency manager with one or more strategies in our investable group it means we have had satisfying on site visits, with full transparency, we have clearly understood the strategies, their key strengths and weaknesses, we can build a solid judgement on how in the future they will perform, and why. As a procedure, the strategies are analyzed through several criteria: some of this are quite basic, like the main overall diversification criteria between systematic and discretionary, macro and technical or market sentiment, time horizon, currencies traded and so on; others, which are probably the real secret ingredients in the recipe for our portfolio compositions are factors which aren’t normally scrutinised in common due diligence processes, or they are looked at from a different angle. This judgemental part of the research and portfolio construction is then matched with a number of % constraints associated to the various criteria. The quantitative part of the process is the simplest and most straightforward, and let me tell you a couple of things here: first, the quantitative portfolio analysis is surely not where JW has any special talent, we monitor all common statistics at a quite standard level; second, we do not give the numbers such an important weight in the allocation decisions. Numbers mainly tell you about the past, we care about the past just as an additional information as important as many others that people wouldn’t normally even consider; numbers don’t tell you much about the future, you can have a clue of the future performance and volatility only by understanding the investment process of the manager.
What steps do you take to control and minimise volatility?
Here is where diversification as explained above becomes useful. We predefine volatility targets the client agrees upon, and design weights in the portfolio depending also on such targets. That’s for the minimisation purpose. Control comes later at risk management level, so let’s talk about risk management. I say, if you toss a coin to take a decision on whether to go long or short, but have a solid and predefined risk management process, it’ll be far better than studying the most sophisticated trading model with no embedded risk controls. JW FX Multistrategy has a three levels risk management process. Two levels act at single strategy level: the first is implemented directly by the manager, and is one of the requirement for a manager to become investable, its clear understanding of risk and a clear risk policy; the second is added by JW with caps, depending on the strategy, on volatility, maximum loss on multiple term basis, and maximum exposures also defined at currency or group of currency level. The third level comes in at portfolio level using the same type of risk controls but on the overall portfolio rather than on the single strategies; this is more of a disaster scenario risk control as far as intra-portfolio correlation is kept low, which is one of our targets. Risk management is real-time. We don’t have yet a complete “Chinese walls” structure, but the risk controls are performed by people who are fully independent from the managers and will act as per policy with communication or dealing instructions. This applies both to Multimanager and to our prop single manager strategies.
JW Partners recently decided to add two FX Single Manager strategies. Can you tell a little about how these operate and what they are designed to achieve?
There was a specific contingent reason for the addition to our flagship multimanager product of single manager proprietary strategies. We had an opportunity to have an experienced and successful FX prop trader to join us. His name is Alessandro Balsotti, had an extensive FX spot market making and prop trading career from Chemical Bank, through JP Morgan, then Caboto and Abax Bank. We couldn’t miss out on the opportunity to add such a good balance of experience and knowhow to the team, giving continuity to the track record of the 2 strategies Alessandro had already traded for respectively 5 and 2 years before. The main strategy, JW FX Macro MT implements a discretionary approach to the FX spot market, trying to exploit and anticipate ‘macro-themes’ with a medium-term time horizon going ideally from one week to several months. Technical analysis is used only in order to fine-tune positions entry and exit and to enhance performance with tactical shorter term trading inside the position. A lot of research is studied to build the macro view, looking across financial markets and converting the trading idea into pure currency trades. Both majors and liquid emerging currencies are analyzed and used to express macro views. JW FX Macro MT target a gross performance of 10% excess return to be achieved with 7%-8% volatility target. JW FX Quant Short Term, added by Alessandro at the beginning of 2007, is a semi-quantitative strategy which follows a model based on chaos theory, pattern recognition and technical analysis. Time frame is typically intraday. Discretion is applied to select trades and define exit points. Only the 5 majors are traded in order to achieve the superior efficiency granted from better liquidity. JW FX Quant ST targets are slightly more conservative both in term of performance (6%-7%) and volatility (below 5%).
How would you describe your investment performance over the last year and has it been adversely effected in any way by the extremely challenging global economic conditions?
Performance has been positive and satisfying for the last year. Intra portfolio low correlation and diversification give the Multistrategy quite stable performances distribution. Having said this, 2008 has been a good year picking up in the second half when financial turmoil gave currency managers good volatility to work on. The fact that due to our portfolio constraints, and also to a discretionary decision, carry strategies didn’t represent an important % of the overall risk, the months which were the worst for the financial markets were the best for us. As far as the single manager strategies are concerned, recent global economic condition have been more a positive than a negative factor. The JW FX Macro had a more challenging environment in the golden era of the one-take-all strategy of carry trade (2006, and most of 2007). JW FX Quant seems to benefit from a high intraday volatility situation like the one we saw during 2008.
The JW Active Currency Overlay team serves corporates who need to hedge their foreign exchange risk exposure. What strategies have you developed to meet these currency overlay needs?
We can have with our corporate clients a double role. We can be consultant who will help them to build a proper currency overlay management policy, support in defining budget exchange rates, evaluate and price the derivatives, and provide strategic trading signals. We can also, or only, be active currency overlay managers, and in outsourcing directly manage their currency exposure. We do so using a mix of 2 styles: the overall risk is based on discretionary strategic decisions which I personally follow and which are most important for the success of the hedging strategy; the more short term market moves are tactically hedged with a fully systematic semi-proprietary trading model.
Is your style of trading systematic or discretionary or a mixture of both?
It’s probably been replied already, but to summarize: as explained, JW FX Multistrategy is of course a mix of many different strategies, which are divided also in systematic and discretionary. Our portfolio composition will consider the balancing of such two criteria together with many others, within predefined constraints. JW FX Single manager also give the investor the possibility of choosing a systematic or a discretionary program, or a combination of both. Finally the currency overlay dedicated to corporate combine the two approaches in an effective way.
Do you believe there are more directional opportunities available in less mature currencies and are you planning to increase your exposure to these?
Yes, I strongly believe in the return generation opportunities present in the emerging market currencies, and within the constraints of the portfolio policy I often advise the investor to allow for a higher than planned weight to emerging market strategies. As for everything, those opportunities have to be exploited by managers who have invested resources and time on understanding those markets, and this is what we look for in the specialized EM managers. One example of experienced know-how on EM currencies, coming to the single manager strategies, is Alessandro Balsotti, who in fact in JW FX Macro MT often uses currencies outside the G5 to better express macro views or to put on relative-value-type trades. In other cases, higher frequency models, or strategies managed by teams who haven’t dedicated research focused on EM, it will be much better to stick to very liquid currencies to preserve execution efficiency.
Did you design and develop your own trading software and hardware infrastructure or was it outsourced to a third party?
We have programmed in house throughout 2008 the portfolio management software used for the portfolio analytics and management process of JW FX Multistrategy. This software is a precious asset of the company and is able to compare and compose all strategies returning ratios, simulating portfolio behaviors and creating charts and statistics. It lacks some cosmetics and special effects features for reporting and presentations, but here at JW the very clear weakness is the marketing part, so no surprise about it; we prefer to strive for excellence on the product, and will leave marketing as a secondary priority. Database involve data of about 200 managers JW Partners monitor constantly. On the software side 2 other important pieces of the puzzle. One is the signal generating charting software developed by an external resource and used by Alessandro Balsotti in the JW FX Quant ST; it is a pure analysis software giving elements for the additional brainstorming of the trader and the decision making process on entry and exit points. The other is the fully automated trading model designed by a partner company for the short term tactical trading in the currency overlay exposures; this definitely belongs to the FX Algorithmic trading industry as it’s based on a high number of interchanging and autoadaptive quantitative algorithms programmed using MatLab. Moreover it can, and does, auto-execute, being directly interfaced with the Fix technology of the counterparty platforms.
Do you think current volatility in financial markets has made successful currency management significantly harder?
Not at all. I know from experience that when you are a focused and disciplined FX manager or prop trader a higher volatility, and to some extent a thinner liquidity which causes it, increase opportunities to be exploited to achieve a better performance, not necessarily increasing the risk taken. Recent market conditions from September 2008 to the end of the year were a combination of volatility increasing and trends happening, probably the best scenario when your risk control is solid and there is talent to exploit such moves. The only market which can really make things harder for a decent performance is a very flat, low volatility and no trending market, where position will have to be increased, or P&L will remain flat or slightly down also for good managers for some time. It was the case for part of 2005 and 2006, and let me tell you no serious currency manager misses those months.
How important do you think the use of advanced trading tools and next generation technology will become in the future for currency managers who are seeking to reduce risk and add more value to their investment portfolios?
Technology will be increasingly important for currency managers who want to become established and further improve from their semiprofessional or “junior” sizes, but mainly at portfolio management or risk management level. At execution level the technology revolution has happened already. The big change was at the end of the ‘90s and after 2K with the advent of electronic platforms, initially interbank with the then called Reuters Dealing 2000-2 and EBS, then at any level even down to retail with the arrival of broker dealer platforms, single bank platforms, other ECNs, and additional technology solutions to aggregate liquidity or implement algorithmic trading even while you sleep. I see room for only a tiny marginal improvement in trading conditions, in terms of spread, for deal sizes from tiny up to 10 mln on the majors. The real issues will remain on liquidity for all trading in bigger clips during volatile times: we all know even a 20 mln cable trade at the end of 2008 was a troublesome size to deal at the spreads we were used to, even worse for the largest market makers. On the liquidity issue, technology will matter less than the strategic choices of banks and funds to be present at market making or market taking – but still giving liquidity – level on the currency market.
Do you expect to see increasing numbers of investors looking to include FX managed funds in their portfolios?
Yes I do. The features of high liquidity and natural opportunity for low or no correlation make it an interesting choice from an asset allocation point of view, where investors need (!) to diversify and find liquid assets. The limit today is still knowledge, and understanding, and if on one side such limit creates an opportunity for companies like JW Partners, who possess and can provide such knowledge, on the other side when people do not understand something tend to hold the decision to buy it for longer. This is why I love to explain to my potential clients the features of our products, and as JW we are keen to make education rather than pure marketing.