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FX MANAGERS

Interview with John Floyd

Cfounder and CEO of Floyd Capital Management LLC

fx managers discretionary strategy John Floyd

John Floyd has been trading currencies for almost 20 years. He has traveled the world working for several leading financial institutions and collaborated with renowned trainers. He explains how he started his own capital management firm and describes his discretionary strategy and how he focuses on generating asymmetric risk return profiles to deliver investment returns for clients. John believes that, due to the confluence of the current global economic and geopolitical events, 2011 could see a substantial rise in global risk aversion, a situation which would offer market conditions and opportunities that have been well suited to his company’s strategy.

   

FX Manager

Spectrum Asset Management, LLC

Strategy

Mean Reversion & Multi-Strategy

Location

Chicago

Assets Under Management

$245M Spectrum GDP $18M Spectrum FX

Type

Systematic

Style

Mean Reverting and Trend Following

Instruments

Spot/Forward Only

 Traded Currencies

G5 Only

FXTM

Tell us about yourself.  How long have you traded foreign exchange for, and what first attracted you to this industry?

JF

Trading as a profession, and in particular foreign exchange, is something that is a very natural fit for me. I have always had an interest in what makes markets move and the valuable role of the speculator in this process. Winning in trading I believe results from the cultivation of a diverse group of personal qualities from many different sources that provide the foundation for success.  I find the parallels between life and trading striking in that both require discipline, planning, self-knowledge, and a focus on winning.  In the words of Gichin Funakoshi “You must be deadly serious in training.”  Throughout my life I have traveled to and lived in many diverse places throughout the world such as Japan, the United Kingdom, and the Caribbean.  While I have been trading currencies for close to 20 years I always had in mind to start my own firm.  I had excellent mentors along the path at some of the institutions I worked such as Merrill Lynch, Swiss Bank Currency Fund, Deutsche Bank, and Argonaut Capital.  Trading in currencies is a real complement to both my life and some of the other pursuits and passions I

have.  I have been studying traditional Japanese karate for the past 15 years under a grand master, rode my motorcycle solo across the United States, collect rare trees, surfed in Iceland, and most recently become a chess pupil of a grandmaster.

FXTM

In which way do you consider trading currencies different from trading other financial instruments?

JF

Foreign exchange is like no other market in the world.  Currencies are something that people touch and feel every day of their lives, the markets are open continuously from Sunday to Friday afternoon in New York, liquidity and volumes are enormous, and participants are diverse.  Currencies reflect relative factors and put the strengths and weaknesses of countries against each other.  Currencies are also impacted by so many different forces that drive capital and trade flows, such as interest rates, inflation, economic growth, asset prices, and Central Bank flows. I think the current macroeconomic environment is particularly conducive for these forces to cause large moves in currency prices relative to other products such as commodities, equities, and interest rates.  Currencies will now likely become the main vehicles, which help macroeconomic imbalances find equilibrium as other adjustment mechanisms have run their course. 

FXTM

When was Floyd Capital created? How is the company structured, and which authority regulates the firm?

JF

I founded Floyd Capital in 2007.  The starting of the firm was a natural step of personal development, goals, and opportunity. 

The current structure reflects the principles on which the firm was founded.  I personally spend most of my time and energy focused on delivering investment returns for clients. To that end all back office operations are extremely streamlined and automated.  Although I have a fund in place many investors prefer managed accounts as they provide total transparency to trade activity and positions.  In addition to myself, there is one other person in the office on a day-to-day basis, a business manager, an economist, accounting firm and legal counsel.  The firm’s primary office is in New York City and I have an office in New Jersey that serves as a disaster recovery site. The firm is a member of the National Futures Association (NFA). It complies with all of the documentation that they require in regards to procedures, compliance, risk management and disaster recovery. Regular review of this provides an opportunity to ensure that the fund’s internal procedures are at their best.

FXTM

How would you describe your investment/management strategy?

JF

It is a multi-faceted process that integrates macroeconomic, geopolitical, and technical analysis as well as market sentiment and risk management.  The core methodology has been built over my years of experience in the financial markets trading not just currencies but many different products.  It is often the case that feedback mechanisms in one asset class drive market moves in others.  An important part of the process is also to determine “the message of the markets”.  For example, do markets respond as expected to a given event or perhaps that event is already priced in and other factors become the primary market drivers as correlations are constantly changing. 

FXTM

Risk, an exciting yet dangerous word. How do you manage it?

JF

Yes, I think that is very true.  Risk can be dangerous and it can be exciting.  I think the way to view risk is you want it to work in your favor and not against you. Risk should be the “friend” of the exceptional trader. In that way I focus on generating asymmetric risk return profiles by striving to correctly choose when to increase or decrease risk and what products or currencies to trade.  I also measure portfolio risk and trade risk through several different methods and have strict limits in place.  To further increase my understanding of risk, several years ago I sought out and worked closely with the noted trading coach Dr. Ari Kiev and was involved in his book “The Psychology of Risk”.

FXTM

Do you use a blend of strategies for diversification or one only?

JF

I use a single discretionary strategy that incorporates many tools as inputs in decision-making. The tools employed are constantly sharpened and honed depending on the particular market dynamics. Diversification is also achieved by paying particular attention to the correlation of positions within the portfolio. The ideal situation is where I can construct a portfolio of a few independent themes with low correlation. Furthermore, I try to diversify the portfolio through a combination of medium to long term positions and shorter term tactical trades.

FXTM

Do you work with specific time frames or do you diversify across a range of them?

JF

What is your average trade duration, and how high is the trading frequency? Historically, more medium-to-long term strategies have been best suited to my performance and trading style. In this type of environment, trades are typically held for at least a week. One area of focus and improvement has been to increase the number of shorter-term tactical trades that may last several hours to a few days, particularly if markets are in tight ranges.

FXTM

How does liquidity impact the efficiency of your strategies? Have you already explored to what AUM limit the strategies would allow you to grow to? 

JF

The currencies I trade are very liquid and my style of trading is such that liquidity would only become an issue at AUM of several billion. I would view AUM of US$500 million as the first goal and level to make sure performance was not jeopardized by asset size.

FXTM

Do you use less mature currencies, or do you plan to add them to your studies and trading?

JF

I rarely use less mature currencies and have no plans to change that in the future. In trading, it is critical to immerse yourself in the market and I find that the lack of transparency and geopolitical risk make it very difficult to develop an investment edge that justifies the risk and dilution of time from other opportunities.

FXTM

Do you believe in “ever-valid rules”, or do you think that every strategy loses its accuracy sooner or later?

JF

Yes, there certainly are “ever-valid rules”.  The first and most important is “the rule of survivorship” and this comes from risk management discipline.    I do believe that no one market is exactly the same but as with many things in life there are patterns that repeat themselves.  As George Santayana said; “Those that cannot learn from history are doomed to repeat it.” 

FXTM

Could you give us an example of a trade you might have done in the past but you would never repeat today? and which lesson you learnt from it?

JF

A very specific example comes from 1997 when I was long the Indonesian Rupee. The trade was both a carry trade and a hedge against short positions in other Asian currencies.  I completely misdiagnosed official policy, transparency, and the extent of corporate indebtedness.  I learned several lessons from this experience and have incorporated them in my investment methodology.  Today, I rarely trade markets with low transparency and if I do so, it is only with very strong fundamental support, extensive research, smaller position size, and often via long option exposure.

fx managers discretionary strategy

FXTM

How do you see your performance over time? Under which market conditions do you generally perform the best, or the worse?

JF

 If you look at my performance since the beginning of my career there are a few notable features. First, my best performance has come when markets have large price moves generated by the resolution of macro-economic imbalances.  Examples of this would be in the Asian debt and currency crisis of the late 1990’s and the most recent credit crisis in 2008.  Second, my flat and losing periods of performance have typically been when markets are in ranges. The latter type of market is one where I have strived to improve performance through such things as increasing short term tactical trading and focusing on more immediate drivers of market price.

FXTM

Can you give some recent examples of where you have made a unique winning decision? 

JF

I think the best example to look at would be October 2008.  While the month was very profitable from a performance standpoint it also highlighted several very important factors.  First, the profits resulted from long held and well researched investment views.  Second, the portfolio was positioned across a spectrum of currencies through both spot and options.  And third, risk management was essential in initial position sizing, increasing overall risk, and then reducing positions and risk in very difficult market conditions. 

FXTM

How do you expect the Eur/Usd to move over the next 6 to 12 months?

JF

To correctly navigate global markets over the next several months one of the most important questions to consider is what is going to happen in Europe. I believe the markets are much too sanguine about Europe’s issues and I expect the crisis to intensify in 2011.  The Euro acts as a “straightjacket” to the peripheral countries and prevents them from redressing public finances without living through a prolonged deep recession.  There is 2 trillion USD of sovereign debt among Greece, Portugal, Spain, and Ireland, mainly held by European banks; this is comparable in magnitude to the U.S. debt crisis of 2008.  I predict the Euro to weaken toward 1.00 as economic growth slows, political will is questioned, and debt restructurings occur within the region. In addition to the European situation, two other key themes will be the ongoing geopolitical uncertainty in the Middle East and the risk that an overheated Chinese economy could experience a hard landing.  The confluence of these global events leads me to believe that 2011 could see a substantial rise in global risk aversion. Historically, this is the type of market conditions and opportunities that have been well suited to my strategy.

FXTM

What’s the best advice you would give to an individual trader and to a semi-professional trader who wants to enter the FX fund management industry?  

JF

The path to success requires full commitment, hard work, discipline and constantly challenging yourself outside your comfort zone.  It’s not luck or chance that makes great traders.