Bob, you are a veteran in the FX trading world and have worked for some of the biggest banks and currency managers in the business. Why did you decide to make foreign exchange the focus of your career and what do you consider to be your particular specialities?
Happy accidents. I was supposed to be a lawyer – I majored in political philosophy at Yale – but after working at a lobbying firm for US industrial companies I knew that wasn’t my path. It did focus my attention on global issues and how they hit the US economy, but it didn’t inspire me. My choice was between the CIA and Goldman Sachs. I took Goldman and started work in the J. Aron Commodities Quantitative Strategy Group. My first day I worked on an arbitrage between Live Cattle futures, Corn and Feeder Cattle – and from then on I was hooked in the mix of programming, mathematics and markets. Realizing I couldn’t handle the time of getting a PhD in Math, I decided to switch over to FX.
My lucky break came one day when I happened to walk by a Forward Trader doing a NY Times crossword puzzle – he asked for a 10 letter word for cave dweller. Troglodyte jumped from my mouth and the job as the assistant forward trader was mine. Foreign exchange is about knowing a lot about global relationships and esoteric facts about the rest of the world. I am a generalist – thinking broadly about how the economy, the markets and the psychology of the world investors work. That is why I love foreign exchange – it’s a natural fit – but one that found me rather than my systematically searching for the perfect career.
Why did CITIC Capital Holdings, a leading alternative investment management company which is owned by CITIC Group, decide to establish CCTrack Solutions earlier this year?
CITIC Capital has been the gateway to investment in China via Private Equity, Real Estate and Venture Funds. But the flow of money into China is being matched quickly with money going out. China is the third largest investor abroad globally – with over $100bn FDI going all over Asia, Europe, Africa and the Americas. The team at CITIC Capital realized this as a big opportunity to provide a needed service to Chinese investors and companies, who have become more global and need foreign exchange hedging advice and expertize. Their interest in Ron DiRusso and myself came about through our third US principal Danny Yee – who worked with both of us at Goldman and over the last 20 years worked closely with CITIC Capital. He bridged the relationships and made the opportunity for a new fund come to fruition. The CITIC Capital management was actively involved in the start-up process. They were involved in reviewing, and approving the business plan, legal framework and the trading infrastructure.
What range of investment and trading activities will CCTrack undertake and what financial instruments will you mainly be using?
Our main focus is foreign exchange products and global financial futures. CCTrack Solutions is registered with the NFA as a CPO and CTA. We are an exempt registered advisor (ERA) with the SEC, and we are currently pursuing voluntary full registration. We also may eventually use short-term government paper to create synthetic forwards for our clients. We intend to stick to liquid instruments – mostly exchange cleared – so that there will be less risk during a crisis in getting out of positions. Liquidity, as we all learned in 2008, remains the first concern for anyone investing in markets. We trade actively using our quantitative approach and will be trading spot FX across the G30 universe, including forwards, non-deliverable forwards and options on those currencies. We also trade futures on commodities, global government bonds (like German Bund futures or Korean bond futures), and futures on broad-based global equity indices (like the DAX or Nikkei).
Who are the key people involved in the firm and what are their main day to day responsibilities?
CCTrack is a team of 12 people – we have six quantitative strategists covering our three main programs – FX short-term trading, Relative Value Options trading, and Risk Parity. That team is led by Ron DiRusso – a veteran of option markets with a long history of trading on both the buy-side and sell-side. He ran global FX options trading for Lehman and Goldman Sachs and, more recently, was a senior manager at FX Concepts. We also have six people on the business side – Veronica Zurita – our head of operations, who was a ten-year veteran at FX Concepts; two salespeople servicing our growing client base; and a dedicated compliance and legal officer.
What sort of clients will you be servicing and do they have any particular geographical distribution?
Our clients will be global and mostly institutional investors. We want to service Sovereign Wealth Funds, Pension Plans, Endowments, Insurance Companies and Family Offices. We intend on raising three kinds of money – mandates for FX Overlay with a focus on Asia; Risk Parity products with a focus on China; and Alpha products for global institutions looking to diversify their usual portfolios with FX as a unique alpha. We have started with a Cayman fund – MultiTrack – which covers all of our main strategies. Some investors will be using individually managed accounts – and some will separate out strategies via fund investments. We want to listen to our clients and provide them with real solutions for reducing their risk and increasing their portfolio returns.
Many currency fund and alternative investment managers have experienced difficulties over the past few years. In what ways do you think this has narrowed the field and presents opportunities for new players like CCTrack?
You can’t get blood from a stone. We are still subject to the opportunities a market does or does not provide us. FX funds and managers have suffered over the last four years as global rates have converged near zero in much of the G10 and global imbalances corrected sharply through 2008. The lower volatility market in FX hurt many that chase trends. The structural shift in banks as they deal with new regulations added to troubles for funds. We think CCTrack will be joining the fight for alpha at a cyclical low for the asset class. Rate policies are already diverging globally, with the RBNZ raising interest rates while the RBA potentially eases. The US and UK will likely be following in 2015 with hikes while the ECB and BOJ are likely going to add to their easy money policies. This by definition makes FX more volatile and means getting into the FX business now is going to be worth the effort. Besides, the playing field of managers dedicated to FX has sharply dropped off – fewer players mean more rewards when these markets return to a more normal global investment flow. Additionally banks are less able to take proprietary risk so opportunities based on supply/demand imbalances will become more prevalent.
What are the main elements of your multi-strategy solution and what will your trading models be seeking to achieve?
Our MultiTrack fund targets 10-12% volatility and 15-18% returns – of course that is a target and we may find that we lose money – but our goal is to find diverse streams of alpha and, to get there, our fund uses three main programs:
1. FXTrack – utilizes a mix of longer-term strategies mixed with shorter-term statistical arbitrage.
2. VolTrack –uses skew, duration and correlation in FX and listed future options to generate a relative value return stream.
3. ParityTrack – a risk parity program that allocates across four asset classes – equity futures, bond futures, commodity futures and FX on the basis of volatility and rebalances daily, effectively harvesting the volatility from a long-only portfolio.
When you mix all three programs together you get diversification that allows investors to benefit from many different types of markets. We aren’t trying to forecast what kind of market we are in – merely trying to trade the opportunities that markets give us. Our approach also has a risk management process built into every model. This means we automatically deleverage and releverage over time according to the performance of each product.
What role will currencies play as an overall component of your quantitative strategies and how will they help you to meet your objectives?
Foreign exchange is intended to be about 70% of our portfolio. We see foreign exchange as a unique asset class that provides a return stream via dislocations between global economies. Our approach uses all liquid tradable currencies – making us focus more on emerging markets than many other managers. We see the global economic pressures in emerging markets as fertile ground for trading models. We are typically long EM volatility and short G10.
What sources of risk (i.e investment, market, operational etc) are going to be involved in the mandates you will be running and what techniques are you employing to manage these?
There are many sources of risk beyond market risks. We built out CCTrack to be institutional starting with our compliance and operations – we want to be above the market standard when it comes to living up to global regulations for investment managers. We also want to make sure our operations can handle the heavy volumes usual for an FX Fund – we are designed to handle $3–4bn a day of trading. Finally, we believe in risk management – starting with diversification of models and markets, continuing with built in stop-loss on drawdowns ,and culminating in the experience of our team (which has over 100 years of combined FX trading experience) overseeing risk reduction when big chaotic events hit the market.
How did you go about building your trading desk IT infrastructure and was the trading software and connectivity technology provided by third party vendors?
“Build or Buy” is the biggest decision for any new fund. We decided to build out much of our IT infrastructure. We built our own FX API platform aggregation rather than outsourcing to a third party. Connectivity in FX remains a battle for High Frequency Trading – something we don’t do – but in order to compete you still have to have low latency and strong IT built into your trading systems. Our servers are co-located in NY2 in New Jersey with links to most of the major FX banks and ECNs.
Do you plan on using any FX algorithms and if so, will these be proprietary and designed in-house or provided from elsewhere?
We trade as much as we can algorithmically. We create our own quantitative models. So they are part of our proprietary IP – all designed by our in-house strategists. This is part of our FX Overlay offering as we will be able to deliver TCA analysis and risk management with ease using our own programs. Algos are increasingly part of the landscape in trading FX – just as they were in equities 10 years ago – and just as in equities, I would expect the market to continue to push Algos for smoother and more efficient execution. We have decided to build our own Algos, as this is part of the alpha process
How do you go about sourcing liquidity and what factors tend to influence what trading venues you use?
Ron and I have a keen appreciation for bank liquidity – we both have worked on that side and know the problems that abusive clients cause. We endeavor to find the best price and trade on it in the most efficient manner but not to arbitrage the FX community in the process. We want to be a sustainable part of the system, not a drain on it. Like visiting a National Park we want to leave it better than when we visited. Sourcing liquidity can be complicated but that is usually linked to the size of the trade and the volatility of that moment. Being anonymous isn’t always the most efficient way to get the pricing you need. We use platforms and direct banking relationships interchangeably according to the product and the time of day as they all are liquidity parameters in the puzzle to find the best price for our clients.
Have you taken any steps to improve your trade connectivity pathways to reduce latency or is that not an important requirement for the type of trading you are undertaking?
Latency is an arms race. We would like to be Switzerland and be neutral in that fight. However, we need to be competitive, as properly timing trade entry is a huge factor in profitability over the holding period – whether for a minute, hour or day. Our trading isn’t high frequency-focused but we need to know that space in order to provide TCA and liquidity analysis that drive longer-term positioning.
Once you have developed ideas for new hedging or currency return strategies how do you go about modelling these and testing them?
Process – we use as close to a scientific method as possible. We use the data and keep our trading strategies simple. Data fitting is a perennial problem to model building. Our efforts start with a simple idea – converted to code – backtested and compared to other models. Once that idea is backtested, we meet as a committee and discuss the strategy. If something generates a positive return uncorrelated to our other strategies we watch it – and see how it performs – and if that works over a three to six month period, we begin trading it live. Much of the work is in fixing models as they fail – tweaking signals so that we can error correct our approaches to different market states.
In what ways do you think new regulatory and clearing requirements that are being applied across the capital markets may impact on your own trading and investment activities and do you see them as a threat or opportunity?
The new regulations that have followed the 2008 crisis are an opportunity for fund managers. The global mood is to push risk in trading away from banks onto money managers. We see this clearly in the FX markets as banks no longer hold big positions in the market and this leads to a more direct pass-through into spot, forward and options as the process of price discovery returns to the lexicon of trading. The liquidity function is not the same as transparency – even though many regulations equate the two. We see the push for exchange like settlement as a good way to mitigate some of the credit risks associated with the FX business. Some of this will clearly cost fund managers – but it is better than paying for an AIG or Lehman blow-up. The net result of regulation in the short-term has been to increase uncertainty over how the real plumbing of the market will work and that has kept many potential investors on the sidelines. When regulations are actually enforced and the market complies we think we will see a pick-up in business rather than a secular decline.
Over the past few years FX has been characterised by reduced volatility and very narrow interest rate differentials between developed currencies. Is this a potential barrier for some of your alpha generating strategies?
Some but not all of our models need volatility to work. The compression of rates and the active intervention by the FOMC, BOJ, BOE and others in bonds have had a negative effect on FX markets since 2008. G10 volatility reached back to 2004 lows and has stayed there in 2014 despite geopolitical noise. But that doesn’t mean that other models we have don’t work. It’s just like a sailboat using only one or two sails – we won’t go as fast but will still have positive returns.
What attributes do you think will give CCTrack an edge and will allow you to differentiate yourself from competitors?
CITIC Capital is a great partner. They provide us a strong, stable financial backing along with access to the second largest economy in the world. China is where foreign exchange will grow the fastest in the next decade. We are well placed to take advantage of the CNY becoming more global. CITIC Capital also has a wealth of experience in running funds and that means best practices and great relationships globally.
What benefits do you see in having CITIC Capital as your major shareholder?
CITIC Capital owns a majority of CCTrack Solutions. This benefits the entire effort because it provides a start-up instant credibility with institutional clients. We also have more time to get this business set up properly with the right regulatory and operational framework with their support.
Do you expect to see the need for FX hedging and diversification to rise substantially over the next few years and if so why?
FX markets are going to change in the next five years – with both Asia and US investors likely to focus more on the asset class as a source of alpha and risk. The US pension world has invested around 20-30% of their money abroad – much of it in emerging markets. This hasn’t been hedged and the need to do so will become clearer as the USD rallies with FOMC rate hikes. In Asia, the Chinese investment abroad push means that investors in the region will need to pay closer attention to FX trends and carry than before. Chinese investors will need to watch the CNY as it sets a new path apart from the USD trends. We anticipate $500bn in money invested abroad by China will need to be hedged over the next five years.
Looking ahead, where do you see the main challenges facing CCTrack as you seek, on behalf of clients, to exploit the risk and reward opportunities of the most liquid markets around the world?
New funds face a common set of problems – scale, focus and market conditions. We have a unique approach that allows us to perform across many different kinds of markets. Our ability to survive in this competitive marketplace will require a bit of good timing, a lot of hard work from a team – making our human resources mission critical to our success – and the willingness of our clients to trust in our process. Client relations are paramount to our success. If we don’t listen to them we won’t be in business for long. The risks and rewards in the present markets are there – nevertheless we believe 15% returns could be possible in the present environment.