FX MANAGERS
as well as global capital flows and balance of payments, using both qualitative and quantitative methods. Te objective is to identify the direction of business cycles and capital flows, focusing on growth, inflation, monetary and fiscal policy. We also develop and analyze systematic investment strategies, monitoring several investment themes that may be driving currency markets, such as carry strategies, price momentum, macro-momentum in commodity prices, interest rates, equity markets and credit markets.
A discretionary process is used for implementation of trade ideas and
portfolio
structuring. Discretion is used to combine both qualitative and quantitative analysis, as well as signals and themes emerging from systematic strategies. Trades are implemented mainly via foreign T-bills, FX forwards and options. In particular, much effort is dedicated to creating option structures to find flexible, risk-efficient and cost-effective ways to implement investment ideas.
Yes, the strategy has evolved over time, adapting to a changing currency market. Initially, the implementation of
trade ideas followed a more systematic approach, in line with ex-
FXTM How do you manage risk in the company?
AL As far as our FX strategy is concerned, the overall risk control process is built on several components: risk controls on individual trade ideas, on individual securities and at the portfolio level.
Trade ideas implemented via FX forwards incorporate stop-losses and trailing stops, while options structures are designed with desired capped risk profiles on an ex-ante basis. Delta
ante defined trading and portfolio allocation rules. Later, unprecedented political developments such as the European debt crisis, “currency wars” and central banks interventions created a non-suitable environment for several systematic strategies, which were developed using samples of historical data that are not accurately representative of today’s macro conditions. Tis led us to move to a discretionary investment process, focused on merging new currency market realities together with traditional quantitative analysis.
FX
hedging programs are also utilized. Collateral investments in foreign short term fixed income instruments are made within sovereign credit limits, as well as typically maintaining limited duration risk to less than 1.5 years ( as noted in the Fund’s prospectus). Soſt and hard monthly stop-losses are also included on the entire active overlay, allowing us to step back and re-assess the market with reduced risk exposures. At
the portfolio
I believe we are in the early stages of a medium term US dollar bull market, which will play out against a large number of currencies
level, the active
currency program operates within a pre-established tracking error limit.
FXTM Could you give us an example of a trade that
you might have implemented in the past but that you would not repeat today? What is the most important lesson you learnt from past trading decisions?
AL
As clearly illustrated by many benchmarks of currency managers’ performance, the last three years have been the most challenging period since the early 1990s. Particularly in 2011, we have been confronted with unprecedented interventions in both G10 and EM currencies. In January 2011, the Chilean Peso lost 7% in the
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