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FX MANAGERS

Interview with Ulf J. Lindahl

CEO & CIO of A.G. Bisset & Co., Inc.

fx managers emerging currencies Ulf Lindahl

Ulf Lindhal directs and oversees AG Bisset & Co’s currency overlay and alpha programs. He produces and publishes the firm’s investment research “Review of Emerging Trends.”Ulf joined AG Bisset & Co since its inception and developed the core currency models used in the overlay and alpha programs. He explains how both the firm’s model-driven strategy - designed in 1983 – and trading process have remained stable at the core; how it has been adapted over the years and includes built-in risk management rules.  He defines how AG Bisset & Co’s current research focuses on designing integrated programs for investors that need to have their exposures actively hedged, blending active hedging, passive hedging and currency alpha in various proportions. Ulf gives specific details about the firm’s trading strategy such as the way position sizes are determined, the use of timeframes, leverage and emerging currencies.

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

How long have you been trading foreign exchange for and what first attracted you to this industry? Tell us about your career evolution?

UL

I joined the firm at its inception and at the beginning of my career, having arrived to the US after completing my degree at Stockholm School of Economics.

I was responsible for developing the firm’s currency models, attracted by the opportunity to work in the financial industry in New York.

The firm began as a provider of currency hedging advice for corporate clients worldwide in 1981 and began to manage currency hedging programs for pension funds in 1988, followed by the introduction of the firm’s currency alpha strategy in 2002.

FXTM

What do you particularly like about your job?

UL

I enjoy the challenge of applying the output of the models to produce the firm’s monthly research report, Review of Emerging Trends, in which we assist our clients in anticipating turning-points in medium- and long-term trends in currencies, interest rates, and equity markets.  

FXTM

In which way is trading currencies unique and different from trading other financial instruments?

UL

I believe it is only “unique” in its unparalleled liquidity. Prices trend and the distribution of price-changes is largely bell-shaped as in other markets, permitting the firm’s models to exploit mean- reversion in shorter-term trends around longer-term trends.

FXTM

When and how was A. G. Bisset & Co. born?

UL

The firm was founded in 1981 with an objective of providing currency hedging advice to corporate treasurers as currency had become an increasingly important factor in creating earnings in overseas markets in an environment in which currencies had begun to float freely in the mid-1970s and the demand for reliable currency advice was at a premium.  

FXTM

How is A. G. Bisset & Co. structured today in terms of head-counts and offices?

UL

Bisset has its main office in Rowayton, Connecticut, an hour north of NYC, and an office in London, with a combined head-count of nine.

FXTM

What do you consider as being the key positions in an FX Management company?

UL

Clearly, the role of the CIO and the Director of Research are important, whether trading ideas are generated by models or through traditional fundamental research.

FXTM

Which authorities regulate A. G. Bisset & Co.?

UL

The parent company in the US is registered with the SEC as an Investment Adviser, while the UK subsidiary is authorized by the FSA.  The parent is also a CTA member of the NFA, although inactive in the futures markets.

FXTM

You are in charge of the currency program at A. G. Bisset & Co. How do you describe your investment strategy?

UL

The strategy is model-driven using models that identify price-trends of 2-4 months in duration, exploiting the fact that shorter-term price-trends mean-revert around longer-term trends.  The strategy uses momentum models to identify when a currency is over-bought or over-sold relative to the longer-term trend and, as a result, signals when mean-reversion is likely to begin.

FXTM

How did you create and develop your current FX management strategy? Has it changed over time, and if yes, what made you decide to change it?

UL

The strategy was developed in 1983 and has been adapted over the years to include additional factors such as a shorter-term model that provides a level of confidence along with rule-based factors that actively scales positions (adds leverage or scales down to use less than the notional amount). These factors were specifically designed to reduced volatility and downside risk in the alpha strategy, now in its 9th year.

FXTM

How do you manage risk in the company?

UL

Risk management is built into the strategy in the sense that the models generate trigger levels that are closely monitored and lead to actions to close out or initiate positions in individual currencies.  Risk is further reduced by assessing a set of cross-rate signals to determine a currency’s relative strength and hence the size of a long or short position.  The positions are then managed with the firm’s shorter-term confidence models adjusting the positions up and down in line with shorter-term price-fluctuations, leading to smoother entries and exits in individual currencies.  Leverage is also managed actively and is driven by the number of buy and sell signals in place.

FXTM

Is there a type of trade that you might have used in the past but that you would not repeat today?

UL

The strategy and trading process has remained stable at the core, but the use of leverage has been modified.  The current strategy will use up to 2.5 times, but averages 1.3 times resulting in returns 1.8 times those that are achieved with no leverage at all.

FXTM

Do you use a blend of strategies or one only?

UL

We apply our models exclusively with no over-ride.

FXTM

What are the market conditions that you consider ideal, and which ones are the most challenging for the performance of your strategy?

 UL

Trending markets are preferred while the few times that currencies are tightly range-bound are the least favorable; there is little opportunity for profit at those times, while the risk of loss is elevated since “whip-saws” can occur. 

FXTM

Can you give us an example of a recent unique winning decision?

UL

The currency alpha strategy is not designed to accumulate returns from unique situations, but to consistently exploit trends of 2-4 months to generate profits over time.

FXTM

Do you use Emerging Markets currencies? And do you think individual traders should use them, considering they don’t have to worry so much about liquidity issues?

UL

We do not employ emerging market currencies in our alpha strategy, but do hedge them actively for clients with investments in those markets to the extent that there are liquid instruments that can be used.  As to the alpha strategy we achieve our return and volatility objectives without using emerging market currencies and exposing investors to their particular risks – illiquidity at times, intervention, trading halts, “a run for the door” by investors, etc.

FXTM

When developing a strategy do you give a higher priority to building entry signals, exit signals or money management rules?

UL

Our current research is focused on designing integrated programs for investors that need to have their exposures actively hedged, blending active hedging, passive hedging and currency alpha in various proportions, and by currency, as the longer-term cycles of 3-5 years unfold in currencies to provide protection against losses, participation in gains, while reducing the risk of negative cash flows stemming from the hedging process.

FXTM

Do you think that every strategy loses its accuracy sooner or later, or do you believe in long lasting market rules? Have you ever found a strategy, which became profitable again after a long negative phase?

UL

Clearly there are strategies that are period-dependent, such as carry. However, we have found that price-changes in currencies and other markets have a roughly bell-shaped distribution that has persisted for long times (over a century in equities).  As a result, mean-reversion is a persistent phenomenon that keeps repeating and makes trend-following strategies time-less and likely to continue to be successful in the future, but with losses from time to time.

FXTM

Do you use any form of optimization? If so, how do you make sure it doesn’t create curve fitting and confirms robustness of the model?

UL

We do not use optimization in the traditional sense that we use correlations or similar methods.  However, the sizes of our positions are determined by the number of buy and sell signals we have for a currency and its cross-rates.  A currency with several buy signals is inherently in a stronger trend and hence a larger position is warranted.  A change in one of those signals to a neutral or a sell would reduce the size of the position even if the trend has not yet reversed. 

FXTM

Do you favor any particular time frame in your strategies? What is your average trade duration and trading frequency?

UL

Our models operate in the 2-4 month time-frame in which mean-reversion gives rise to many profitable trends.  That horizon also permits the trading activity to be rather limited compared to high frequency trading exploiting shorter-term factors.

FXTM

What is the average leverage that you normally use? and the maximum leverage?

UL

Maximum leverage is 2.5 times, minimum is 0.5 times; both are used about 25% of the time with portfolios using no leveraged 50% of the time, resulting in an average leverage of 1.3 times – a factor that has been steady over the past 17 years when our historical model-signals are examined.

FXTM

How many execution brokers do you use? How do you split execution between electronic and voice?

UL

Trading is by voice and we utilize around 15 counter-parties with several of them tied to specific clients in the active hedging program since clients must have dedicated FX credit lines that we utilized to place and remove hedges in their name acting as an agent.

FXTM

Which historical data do you use when developing your strategies? How important is that?

UL

Price-data has been the only input and is the only input in the models.

FXTM

Which software do you use in the research, risk and reconciliation functions?

UL

Our programs have been developed in-house to match how our models and strategies operate.

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?

UL

Since our currency alpha program is designed around the G-4 currencies, the $4 trillion in daily turnover, of which 70% or so is in the G-4, means that the strategy can accommodate billions in AUM, particularly since the strategy adjusts positions on average once a week.

FXTM

What is the biggest strength of your team?

UL

Team-members have been with the firm for many years and are extremely well versed in the firm’s strategy and in implementing the model output.  The increased automation of the signal generation and trading processes has been beneficial over time.

FXTM

Can you give us your feeling about the move of the EurUsd in the next 6/12 months?

UL

As trend-followers, we reserve the right to change our forecast at any time as a trend reverses, but as of end of May 2011, our models are indicating that the euro most likely has peaked against the dollar after rising in the first part of 2011.  The dollar is poised to move higher in the months ahead, potentially by a significant percentage.

FXTM

What’s the main advice you would give to traders who want to enter the FX fund management industry?

UL

Carefully examine potential firms as to what their future growth might be in terms of AUM, what strategies they employ, and what long-term risk those strategies may have.