FX MANAGERS
utilizes a proprietary volatility valuation methodology to rate volatility relative to its historical norms. Te model enters trades only when volatility is deemed to be in a value zone – this leads to larger position size for a given amount of risk. Te theoretical underpinnings of the methodology are that volatility is mean- reverting and directional trading systems effectively replicate long positions in
options.
I nd iv id u a l positions each have a limited loss governed by a trailing stop but an unlimited profit potential. Drawdowns in this context can be viewed as equivalent to time premium. We view the primacy of the volatility analysis in our model as key to addressing the issue of drawdowns (the volatility screen, in our view, improves the risk/reward of the model’s trading).
FXTM How did you create and develop your current FX management strategy? Has it changed over time, and if yes, for what reasons did you decide to change it?
AB
Te theoretical underpinnings of the model that we use today in the FX Program date back to my years at the
Chase Manhattan Bank in the early 1990s and I have been working on the model continuously since then. Research and diagnostic studies are an ongoing process to understand the Program’s performance attribution as well as to guard against Changes
are
structural degradation. implemented
only infrequently when structural weakness
FX
market environment is not conducive to our methodology and thus the key is to control risk. We implement three levels of risk control for the Foreign Exchange Program. First, at the portfolio level, open positions are monitored so the maximum drawdown for the entire program in a crisis scenario (all stops are elected in a 24 hour period, bringing the portfolio to all strictly
cash) is limited.
In addition, m a x i m u m l e v e r a g e is limited, p r o v i d ing a second layer of risk control at the portfolio level. Second, risk is distributed b e t w e e n the model’s medium-term and short-term component s . Tese two
are identified through diagnostic analysis and not though optimization studies. Tere have not been any major changes to the Program over the last decade.
FXTM How do you manage risk in the company?
AB
Risk management is absolutely the key to long term success for any money manager. We know our systems work but we also know that there will be periods where the
components have a low correlation over time. And third, at the trade level, positions are volatility-weighted to limit the risk to the portfolio from any one position. Te system uses trailing stops which are adjusted daily. On average, the risk per trade has tended to be a bit under 50 basis points. Risk control does not stop with the Program’s trading rules. Sound trade execution and operations as well as contingency planning are exceptionally important. We have developed procedures to address these
FX TRADER MAGAZINE April - June 2013 55
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84 |
Page 85 |
Page 86 |
Page 87 |
Page 88 |
Page 89 |
Page 90 |
Page 91 |
Page 92 |
Page 93 |
Page 94