Insch Capital Management Focused on delivering better risk-adjusted returns

e-Forex talks with Christopher Cruden, CEO of Insch Capital Management SA, a leading alternative investment manager based in Lugano, Switzerland.

Chris, how long have you been in the asset management business and what attracted you to the industry?

All in all, just over 30 years. In 1979 I made the odd leap from being a British army officer to becoming a gold analyst in South Africa. This was during the heady days of Howard Ruff and $800 gold. In 1983 I joined Dean Witter Reynolds in NY as a stockbroker but found it a little boring. Luckily, DWR started a Managed Futures department and amongst other strategies, we had a currency fund… This was pretty leading edge for those days. I joined AHL in London in 1988. At the time, I think the firm had about $5 million AUM. 

After the sale of AHL to Man in 1990, I joined with Robert M. Tamiso in NY and we launched an interbank currency fund in August 1991. - I only mention all this ancient history because I have been privileged to work with David Harding (Winton Capital) and Bob Tamiso, who are 2 of the very best systematic, trend-following managers and traders who ever lived. And I have met a lot.

I like the business because I like the challenge. I genuinely cannot imagine what else I would do. 

When was Insch Capital Management (INSCH) founded and how is the organisation structured?

Insch was formally founded in 2000 and re-located to Switzerland in 2004. The legal structure is a “limited liability” company. I am the sole shareholder. 

In terms of business structure, it is pretty typical with one major exception; we do not have a formal marketing or product distribution function. That leaves just research, trading and administration. In total, we have 8 people in our office in Lugano. Our Chairman is based in London as is our General Counsel. 

Who are the key people involved in the firm and what are their main day to day responsibilities?

All our people are “key” because they all have a function that is vital to the continued success of the firm.

My partner, Geoff Baker, is 2i/c and is responsible for all trading and commodity investments. It is all too easy to become immersed in the mumbo-jumbo of the “alternative” investment industry. Geoff’s often blunt advice – “the view from the trading desk” – is absolutely crucial to our functioning.

Geoff is ably assisted in the trading activity by Robert Aleksovski who has a Degree in Business Administration and minors in Computer Science and Management Information Systems.

Research is headed by Purnur Schneider, FRM (who has more qualifications that I could possibly list here) and she is assisted by Rivaldi Kwan who received his first degree in Aerospace Engineering. Rivaldi is about as close as we get to a “rocket scientist”.

We don’t actually have a PhD and I would never hire one on the basis that Winton has already hired the best ones. Back office and administration is run by Rossana Locher who has been with me since we first moved to Lugano and Marzio Martinelli who is our bookkeeper. 

Maurizio Catteneo is our Compliance Director. Maurizio was at UBS Private Bank for 18 years. His primary role is the detailed analysis of client relationships with regard to compliance and specifically, to the development and adherence to anti-money laundry policies and procedures. 

Despite the emphasis on “discipline” that we place on our trading, we tend to operate in a relaxed atmosphere without a great deal of hierarchical nonsense. We operate more like a “special forces” unit than a “regiment” and we all seem to like it better that way. 

What investment and advisory services does INSCH provide and how much of your business is focused on currencies?

No question about it: We are best known as a currency manager. 

But we also have a BVI fund called Insch Insight Ltd. It has 2 share classes: “Goldilocks”, as the name implies, is focussed on gold. It offers 90% capital protection and is enhanced with 20% of the assets allocated to our currency program. 

The other share class is “Blackgold”. It is an income based investment with a 9.5% yield and no fluctuation in NAV. The yield is paid from revenues derived from the oil wells the fund owns. Over the last few years, we have also become very involved with physical commodities and commodity finance. 

What sort of clients does INSCH target and provide services for?

Our target clients tend to be bank, near-bank or other institutional asset managers. We don’t really have any “retail” clients. Having said that, we do have relationships with a number of on-line forex brokers and they group clients so that we just make one trade on their platform and they do all of the back office work such as trade allocation and reconciliations. 

All of our accounts get exactly the same trades so the only thing that differentiates one client from another is the commissions they have negotiated with their broker of choice, our fees (which are industry standard) and the level of risk they wish to take. This is a function of the gearing they apply.

How does Risk Management influence and shape your overall investment philosophy?

The key to this is the old saying: “If you can’t measure it, you can’t manage it.” So, the measurement of risk is the life-blood of everything we do and there is a simple reason for that: It is mathematically harder to make back lost money than to make new money. If an investment loses 50% it requires a 100% gain to get back to par. A loss of 25% requires a 33.33% gain. A loss of just 5% requires a gain of 5.6%. And so on.

In a world where the “risk free” rate is basically zero, making back even small losses is hard. The best solution to this is to not make the losses in the first place.

What currency programs does INSCH offer and how are they implemented and executed? 

We only have one program: Kintillo. But within the program there are currently 16 separate and distinct algorithms. 

All clients get exactly the same signals and trades. Before gearing, the portfolio has approximately 1/2 the standard deviation of the S&P500. It follows that gearing the system by two times gives approximately the same “risk profile” as stocks. We would rarely trade any account at more than three times gearing. 

The client can nominate whoever they wish to hold their money and execute their trades. We really don’t want to be a part of that conversation.

What are the main factors that drive your firm’s currency investment decisions?

We are entirely systematic trend followers. In no sense are we predictive. As a famous systematic trader once said to me: “We don’t do chicken bones or tea leaves. We don’t have crystal balls. We have steel balls.” 

We do not claim, or intimate that we know tomorrow’s prices because we don’t. (If anyone reading this does know tomorrow’s prices, please don’t tell us: It would spoil the surprise.)

Our program is, in effect, a probability model in which, at instigation, all trades are risk equivalent.

A perfect system would have a 50% / 50% win loss ratio and a 3 to 1 payout. Such a system would soon acquire all the money in the world. Unfortunately, we have a 35% / 65% win loss ratio and a 2.42 to 1 payout.

The fact is, getting the trade direction “right” is the least important part of the algorithm. The money management rules are far more important. 

Statistics - August 2012

Statistics - August 2012

In what fundamental ways does your investment approach differ from other money managers?

Without knowing precisely what others do, that’s a hard question. All I can say is that we are utterly disciplined in following our system. And we do so without hope, greed or fear. We do so with the certain knowledge that markets exist in order to teach humility and not just for our personal enrichment. 

I have noticed that none of our computers have ears or eyes. They can’t actually hear or see. They don’t hear opinions. They don’t even see currencies: just numbers. This is just as well.

What computers can do is take vast amounts of data and calculate variances, correlations and a whole range of other useful things.  Most investors lose money due to Emotion and /or Ego. A truly systematic approach removes both of these dangerous things. 

Do you have any particular preference for specific trading time horizons, such as medium to long term?

Kintillo is, by design, a long term currency program. As a point of interest, our “winning” trades are held for over 20.7 days and our “losing” trades are held for 5.9 days. Each cross is traded approximately 2.36 times a month. And we only trade once a day: London at around 13:00.

This makes us pretty uninteresting to most platform vendors as our volumes are so low. Whenever we are visited by them, after the usual questions about the program (returns,, etc.) the last question that we are asked – just before they get into the elevator is: “So… How many trades do you make a month?”  For many of them, being an “asset allocator” is just a disguise to get brokerage.

We don’t take commission rebates from brokers because of the conflict of interest. We would rather rebate a split of our fees to them than have them mark up the spreads the client pays or trade more frequently. 

A few years ago you told us that the overall strategy for INSCH was for each business area of the firm to fuel the others. Has that paid off?

Yes… and No. But mostly no.

In terms of our “business model” (a ghastly term) we have made some mistakes. There is no question that we should be much bigger than we are. At least, that’s what we are often told. 

The problem is, we have always lacked the ultimate courage / conviction - call it what you will - to seriously market our firm and its products and services. The reason for this is because I have always believed that we are only as good as the representations we make. While we are entirely comfortable in making representations about ourselves, we are less so about others making representations about us. Consequently, we have never really had any “sales” people and although we have periodically toyed with the idea of using 3rd party marketers, we have never really got around to it. This failure, if that’s what it is, is entirely home grown.

In addition, I am not a fan of the so-called Fund-of-Fund business. Or, for that matter, the Hedge Fund business. (Don’t get me started on this topic...) We make virtually no effort to market to this sector. It seems to me that the HFM / FoF industry has made an art form out of contrived complexity. (As I said, don’t get me started…)

As a currency manager, born of the CTA community, I am perfectly used to being the “red-headed step-child” of the asset management world. 

The plain fact is, being a trend follower makes us intrinsically uninteresting. We really have no market view and we have nothing to say about market fundamentals. Of course, we could make something up to make ourselves sound more knowledgeable / interesting / controversial but even if we did, it would have no impact on our trading decisions. 

As owner of the business, these attitudes and mistakes are ultimately my responsibility so there is no-one to blame but me. On the other hand, we really like us. We really like what we do and we really like how we do it. We like being us. 

By any measure, we can be proud of our record, our company and ourselves. 

It has been observed that we can be regarded as distant and arrogant. Unsurprisingly, that doesn’t bother me at all.

The team

The team

How do you go about back-testing your proprietary currency trading systems and signals to confirm that your strategies will perform as required and what are the advantages of the INSCH methodology for applying Bootstrapping Simulation?

We perform exhaustive back-testing of our systems, using a myriad of settings and the various permutations of them over as much data as we can acquire. We construct heat maps and visualize performance in all kinds of markets and currency regimes in order to identify and eliminate potential surprises. The marginal contribution and diversification potential of each currency pair to the portfolio performance is assessed. We also employ bootstrapping which is simply a method to project results by using historical distributions rather than theoretical ones. One advantage is obviously getting rid of the need for parametrical assumptions. Another advantage is the possibility to build scenarios based on expected market regimes, and obtain thorough descriptions of what possible conditions may look like. 

This may sound like “torturing the data until it confesses” but we do have some considerable experience in building these systems. 

We support our back-tested conjectures with research on the multiple issues that FX trading may be confronted with. For example, last year we performed a deep study on the correlations between our trend strategy and naïve FX trading strategies such as Carry and PPP. We also gave a close look at the performance of currency pairs and systematic programs during currency intervention episodes. Most recently, we have reviewed the system’s volatility filters in order to reduce the size and duration of drawdowns, by minimizing the volatility drag. 

We analyse these issues one at a time, and there are many issues that we have not discovered yet. We have performed similar research on other assets that Insch investments are based on, such as gold and crude oil. 

All our research is publicly available on our website, not only in FX but in other asset classes as well. We maintain our focus not only on FX but also on other asset classes related to Insch investments and we try to keep an eye on the whole industry. We do our best to warn investors of the dangers in some of the most popular asset classes: For example, “traditional” asset management of stocks and bonds. 

To what extent have you developed research agendas and analytical programmes to help improve the design of new trading strategies and to maintain the performance of your existing investment processes?

Our research agenda revolves around being disciplined and systematic. We do not make changes to our trading system unnecessarily. We do not change the settings just because we have one or two negative months. We have back tested the algorithms to the point that we are comfortable with them and we feel they are robust enough to meet our investment objective. No one knows what tomorrow will bring and we pride ourselves on being purely systematic. So we stick to our proven algorithms. 

We have accumulated literally dozens (hundreds?) of different algorithms: some were developed in-house, some were developed under consultancy agreements and some have been thrust upon us by an enormously long list of “Holy Grail” discoverers. With regard to new trading strategies, our research team keeps an open heart and an open mind. We have come across and tried many other trading strategies – however none of them are suitable for us; for example, they might be discretionary and / or have poor relative performance. 

We keep track of our yearly, monthly, weekly and daily performance of our portfolio. If we see any anomaly, our team is instantly ready to take action. Thankfully, such an event has not happened yet.

How much reliance does INSCH place on the latest automated trading tool-sets and execution algorithms to help you better manage risk, optimize trade execution pathways and meet your investment objectives?

Kintillo is a long term systematic trend following system. The average winning holding period is around 21 days and losing holding period of 6 days. It is not by any means a high frequency trading system and we only trade once a day. Hence, automated trading execution is nice but not crucial to us. 

The signalling algorithm is, however, fully automated and was developed in house. At 13:00 London time, the algorithm will automatically request the current prices of all the pairs traded and crunch the prices according to the bespoke setting of that specific currency pair. There are a number of different parameters for each currency pair. The parameters have gone through the exhaustive back testing process mentioned earlier to the point that we feel comfortable with them. - We distrust elegance, we eschew complexity and we adore robustness.

If there is a signal for any specific pair, it will be displayed on our proprietary front end platform. All this process is extremely fast, only seconds from requesting the price to signal generation. The whole process is overseen by an experienced trader every day. If there is any problem, the algorithm is set to send out an email alert.

So, the signals are ready to go at around 13.01 pm and each individual signal is displayed on our platform. This signal will remain visible throughout the day until the next day when it will be replaced by the new signals. A trader will log into our platform and execute the signals manually on the broker’s platform, or they can be done electronically.

Insch Capital Management  Focused on delivering better risk-adjusted returns

The front end platform also keeps track of a couple of other things such as the last 30 signals, opened positions and their real time P&L, trade board and portfolio summary. The trade board offers graphical information relating to the direction of our trades in the portfolio. A sample trade board can be seen at the base of this page.

What electronic trading platforms does INSCH find most appropriate to use and what factors influenced your choice?

We use a number of different platforms chosen to meet clients’ needs. In general what we are looking for in a platform is the quality and speed of execution, which implies an assortment of aggregated liquidity providers. The ability to directly connect to an MT4 environment is also crucial as it is an integral part of our strategy relating to the back testing process and trading. 

Another factor that we consider when choosing a platform is whether it has an integrated allocation tool, allowing us to allocate trades among multiple accounts using predefined keys. As we are actively involved in trading asset classes other than forex, a platform that offers different products in one place would be considered preferable. 

Summa summarum, we are looking for a multi-asset platform that offers more than just basic functionality in terms of order customization and technical analytics tools.

Total Variance and Marginal Contribution to Portfolio Variance

Total Variance and Marginal Contribution to Portfolio Variance

How did you go about building your trading desk IT infrastructure and was the trading software and connectivity technology provided by third party vendors? 

The IT infrastructure is at the core of our trading activity and it is provided by third party vendors at the advice of our IT consultants. The signalling algorithm on the other hand was developed and implemented in house, benefiting from the vast market experience of our team. As mentioned before, we use third party trading platforms for trade execution only.

The above figure shows our trade board for August 2012. Grey and White cells mean we do not have any open positions on that day. Bright red means we are short a risk unit, dark red means we are double short a risk unit, bright green means we are long a risk unit, and dark green means we are double long a risk unit. The trade board offers valuable information about the overall position of the portfolio and we use it to anticipate upcoming possible trades. (NB: EUR/AUD and EUR/CAD commenced trading on 09/03/12.
The above figure shows our trade board for August 2012. Grey and White cells mean we do not have any open positions on that day. Bright red means we are short a risk unit, dark red means we are double short a risk unit, bright green means we are long a risk unit, and dark green means we are double long a risk unit. The trade board offers valuable information about the overall position of the portfolio and we use it to anticipate upcoming possible trades. (NB: EUR/AUD and EUR/CAD commenced trading on 09/03/12.

In what ways has technology made your business more scalable and increased trading and investment opportunities for the firm within the FX market?

Technology has not just made our business “scalable”, it has made it possible.

Having entered the business back in the “dark ages” - when the AUD was traded on the exotics desk and there was virtually no price data - it is obvious that the entire FX trading world has changed enormously. – All due to technology. The arrival of the internet, emails, Bloomberg and all the other taken-for-granted accoutrement of the modern trading environment has revolutionized the markets and the industry. The fact that we can now enter and exit trades without leaving a discernible footprint in the market is an enormous step forward for people like us.

Despite our seemingly old fashioned, fuddy-duddy ideas, we strongly believe that this is an enormously “good thing” for everyone: most of all, for investors of all kinds. 

In the olden days, it was very difficult for a retail client to trade currencies other than with futures and most likely with a commission driven broker who may or may not have had any real knowledge or expertise. It was very difficult to open a trading account with a bank. It was almost impossible for most retail clients.

Currency trading, such as it existed, was a “professionals” market. Nowadays, virtually anyone can open a currency account, put up their capital and trade away until it’s all gone. 

What new strategies and products has INSCH been exploring as part of your continuing efforts to widen the range of currency investment solutions and customised services you make available to clients?

We recently added two
new currency pairs, EUR/AUD and EUR/CAD. 

We believe there is potential for large moves in these currency pairs going forward. In back-testing, the price formation in these two pairs appears to be highly favourable to systematic trend-following, so we expect significant gain opportunities. These currencies will also provide an additional layer of diversification at portfolio level.

We have also tested and modified the volatility filters’ parameters on the existing currency pairs, in order to reduce the probability of lasting drawdowns such as the ones observed in 2009-2010. According to our expectations, confirmed through back-testing, a good way to avoid losses in extremely volatile environments is to temporarily close trades. Sounds simple but the problem is, how and at what price / volatility do you get back in or reverse the position?

The table above shows the results of a study we performed regarding the value added by a volatility filter in a systematic trend following program.

The table above shows the results of a study we performed regarding the value added by a volatility filter in a systematic trend following program.

Do you see the changing regulatory environment in financial markets presenting a threat or opportunity to leading alternative investment managers like INSCH?

In my opinion, based on a personal observation period of 30 years, the financial services industry has never been more regulated, more expensively regulated or more incompetently regulated. The correlation between increased regulation and the frequency and severity of financial crisis is near perfect.

I think it was Ronald Reagan who said that the scariest words in the world are “I’m from the Government and I’m here to help”. He was right.

Looking ahead, where do you see the main challenges facing INSCH as you seek new ways for capturing and exploiting investment opportunities, particularly with currencies, whilst maintaining the key strengths and operational advantages of your asset management services?

Unquestionably, as the industry evolves, there will be challenges ahead and we will deal with them as we have in the past. That is the case for the entire industry   – not just Insch. 

However, the real threats – those things that present the biggest danger – are externally created. Things like the Tobin Tax, additional regulation, increased market-rigging by Central Banks and politicians etc. These are truly dangerous and result from the current obsession with de-risking rather than increasing responsibility and accountability within our society.

In terms of Insch’s specific business, our interests are best served by continuing to offer a currency management program with better risk-adjusted returns than our competitors and other asset classes. As we have in the past.This will most likely be achieved by concentrating on low-leveraged strategies traded in the most liquid, transparent FX markets. As we have in the past.

Thank you for allowing us this opportunity to present ourselves.