TRADERTALK
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a “quant” firm emphasizes the systematic nature of their investment process, and typically uses factors or transformations of historical data that have forecasted returns successfully in the past. Te essence of our process is our focus on fundamental causes in the research process from the outset.
Te second thesis embedded in our currency forecasts is that at a long-run horizon the relative soundness of monetary and fiscal policy is a key determinant of the movement of exchange rates. In similar fashion to the divergence thesis above, we derive sufficient statistics that form a future projection of the credibility of a nation’s commitment to sound money. To illustrate the concept of a sufficient statistic that proxies for broader, long-term monetary soundness, consider the 5-year - 5-year forward break-even inflation rate in the U.S. As the rate rises, it signals that participants in both inflation-linked and nominal U.S. government securities markets believe that the inflation rate 5 years into the future will rise, whether by lack of institutional commitment on the part of the Fed or by circumstances imposed on the Fed by the U.S. Congress.
In what fundamental ways does your investment approach differ from many other money managers?
Jim: Principally, we are an investment firm dedicated to trading fundamental macroeconomic ideas. As an integral part of our investment process, we employ the scientific method to vet and refine our ideas. Specifically, our research process always begins with a fundamental thesis or idea; for example, “international capital flows are an important determinant of movements in foreign exchange rates.” Next we derive a falsifiable, quantitative expression of that idea and we look to test it against data. In fact, the vast majority of the research documents that we generate describe empirical implementations of ideas that we are able to falsify and consequently do not trade. In this sense we differ from the majority of “quant shops” or CTAs, in that they are typically more agnostic (Bayesian) in their use of signals and factors. Often
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Karlheinz: QFS’s competitive advantage rests on the fundamentally-based investment processes developed by QFS’s research team over the past two decades. Some of the hallmarks of QFS’s approach to investment process development include mastery of academic research in economics, finance and quantitative fields (our research team’s five PhDs have 80+ years of experience in the academic and private sectors); the centrality of fundamental rationales behind our investment theses, whether macroeconomic, micro- structural or behavioural; systemization, automation and diligence in the daily operation of our investment processes; strong emphasis and resource dedication to risk management and draw-down control; and finally, ongoing research and development as the core competence and activity at the firm. Te firm is widely considered a leader in the field of global macro trading, quantitative risk management and advanced portfolio optimization techniques. Te firm’s research culture is dedicated to scientific investigation and reliance on detailed, repeatable methods to govern investment- related activities. We have found that our Currency Program has a low correlation with other hedge funds or trading advisors.
Do you have any particular preference for specific trading time horizons, such as medium to long term?
QFS’s investment Programs take a unique approach to producing alpha based on macroeconomic fundamentals that play out over a business cycle time horizon. QFS utilizes econometric models, theories of the informational roles of prices and a robust, systematic, disciplined portfolio construction and risk management approach to build risk-controlled portfolios that capture alpha over a 6-24 month time horizon.
We all know that FX is a deep and liquid market. How important is that to the development of your trading models and strategies and what relevance does it have for your draw-down control methodology?
Jim: Keynes was attributed as saying, “the market can remain irrational longer than you can remain solvent.” Like the quote says, we recognize that non- fundamental factors can move asset prices in the short run. Drawdown and Scaling Technology is essential to our investment process because it imposes risk discipline required to stick with fundamental themes over the long-term. Drawdown scaling is embedded in
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