Should currency managers also be marketers and educators?

fx managers currency managers

I was recently invited to attend FX Invest Europe, a one day conference well organized by FX Week for professionals of the FX industry in Zurich. From the sell side currency managers, software and information providers, market makers; from the buy side, multimanager entities like us, institutional investors and on the side a couple of mid/large size corporate treasuries.

It was an interesting 8 hour rundown, both from the networking and contents perspectives. Panel discussions and presentations spanned from currency fundamental perspectives to algorithmic high-frequency trading, from benchmarking methods of the currency manager’s performance, to risk detection and management issues.

There would be a lot to talk about, focusing on each single argument aroused from the single panels but, there are two things I took away at the end and that will remain the strongest memories from that day … in order of appearance.

First, the cool anti-stress rugby-shaped balls that the SocGen guys guys provided as a souvenir for visitors at their e-commerce desk (thanks Leon) ... my sons (and I) throwing the balls around home will make this by far the most noisy and lasting memory.

Second, the final part of the very clear closing remarks from our excellent host Justyn Trenner, CEO of ClientKnowledge: “Go out there and try to be less FX managers and more FX marketing people”.

Now, disappointing the audience interested in kids and rugby stories, let’s focus on the second point. That was a great statement as it summarized in a positive and, at the same time, negative way the status of the FX world globally.

Let’s start with the “negative”, and to explain this thought I have to start from different worlds if compared to the very professional industry participants who were attending that conference. Foreign exchange, in its most commonly known abbreviation, forex, is today as ever mostly associated to the retail trading on line community, where most of the people unfortunately end up losing money. This is no different from on line trading as a whole in the financial markets, the reason behind it being a powerful greed that often drives the final smaller users, who forget all discipline and risk-reward logics for an activity, which is closer to pure gambling excitement than to a successful method for making money. We are talking about the unconscious choice between 2 targets, having fun or making money. This is a psychological issue, and it happens even to people who have been in the financial markets for a long time and who are not supposed to be making the same mistakes all over again – obviously not from the abovementioned professional fund manager category.

Marketing activity from all retail oriented brokerage companies was very powerful over the last few years, making forex one of the most clicked financial words in the web. I very well know some of these companies and, in most cases, there was no direct aim at pushing people towards losing money, even if this creates a direct revenue benefit for the broker-dealer but, the marketing message was definitely more effective when stressing the features of the market which – guess what – are the ones that make more losing trades happen; on top of all, high leverage/low margins.

Taking this from a different angle, one of the reasons why the financial world ended up in a dramatic bubble which caused several injuries when it exploded was that the growth strategies of banks and financial institutions were rarely driven by the quality of the underlying products, being supported almost always by the commercial suitability of such products. The focus was – too often – on that side, marketing, rather than on the product quality side. And the consequences were of course a more rapid and further reaching – but less solid - growth, and a more destructive comeback.

Last, let’s get into the hedge fund companies, how many stories of companies raising excellent assets to manage thanks to their commitment and performance, and then losing money because of the natural shift of the focus towards marketing.

These three examples, or real history case studies, suggest that the word marketing by itself, when it becomes the priority, can be dangerous to say the least.

 If my regard for the quality of the participants at the Zurich event wasn’t very good, I would have to stop here. But knowing where that remark was made, and to whom, I can move on to the positive thought deriving from it.

We, in the currency management industry, are in a situation where many, or most investors, whether they are small or big, retail or HNWI or institutional, do not even know that they could somehow access high quality FX investment products. For this reason, we as professionals need to tell people about it, using communication tools to – see what word I’m using – EDUCATE! I prefer to read Trenner’s word “marketing” in its most appropriate meaning here, which is communication and education. As far as we as market professionals focus on explaining, educating, without forgetting the dangers connected to the pure focus on marketing and sales, then our effort will be rewarded, because what we are trying to do here is only to satisfy what are evident needs of the investors, liquidity and non correlation, and we know these can be easily provided and guaranteed. But not easily explained to the “foreigners visiting this new world”.

In fact, it’s not over, as the investors will at last know about the currency single or multimanager products, an important part of such education process goes through explaining then what difference is there between one strategy and another, how to identify quality in the “alpha generation” process, and how to guarantee that the non-correlation feature remains valid over time. In fact, if there is no discussion about the possibility to deliver easy revaluation and thus liquidity, there is no single behaviour of the performance and correlation components to the story.

Performance, first we’d suggest all investors to resist the temptation of those apparently hyper perfoming traded accounts presented on some forex websites; that is obviously not the quality we are talking about, hardly any due diligence can be made on such companies and their strategies which belong mostly to the retail brokerage world rather than the professional currency managers industry. Second, even among the professionals, there’s no straightforward guarantee on what performance will be achieved, as someone will manage to post a better or worse performance, but within the features of volatility and past behaviour of our single or multi manager investment products as they have been presented initially to the potential client.

Correlation, it may still happen to an investor to see the NAV of its currency asset moving downward in a straight line while equity markets are in a downtrend. Why could this happen? For example because of the possibly heavy presence of carry-type strategies. Carry, from the concept of carrying the position forward and taking advantage from the time going by while sitting on a position long in one currency which gives us high interest rates, and short in another currency where financing cost is very low; the typical examples in the past, all crosses against the Japanese Yen. Now, some carry strategies can retain an intrinsic long term value, if they are built on solid methodology and match the investment time horizon; but, if the main target is no correlation, they don’t really fit unless they are built on very robust basis, or unless they represent only a modest percentage of the allocated risk.

The hardest part of the education process will thus be to help the investor to really understand what he’s buying, without forwarding the wrong message, because otherwise the whole industry may be damaged.

Before closing to go to play home-rugby with my kids, let me say I’m honoured to write a piece on FX Trader Magazine; I believe its contents and style will help over time this education process towards those “foreign visitors”.

Giovanni Pozzi