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FX MANAGERS

Interview with Ron DiRusso  

Head of Investment Research and Portfolio Manager

fx managers foreign exchange strategy Ron DiRusso

Ron DiRusso’s career includes eleven years in Goldman Sachs and five years in Lehman, where he ran Global FX options. Expert in volatility products with a strong experience in currency options, he is now Head of Investment Research and Portfolio Manager at FX Concept, one of the world most renowned currency managers. Ron tells us about his work at FX Concepts and how he manages the currency program and strategies

 

FX Manager

FX Concepts

Strategy

Multiple Strategies

Location

New York

Assets Under Management

3.5 bln USD

Type

Systematic

Style

Multi Strategy

Instruments

Spot, Forward and Vanilla Options

 Traded Currencies

G10 plus  Emerging Markets 

FXTM

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

RDR

Well, my career path wasn’t exactly the standard for finance back when I started at GS in 1985.  I was an Electrical Engineer working on Local Area Networks at Bell Laboratories in New Jersey when I received a call from someone about a job at a place called Goldman Sachs.  I had never heard of GS at the time!! After some investigation I decided to pursue it and ended up as a Quant in the J.Aron group supporting foreign exchange.  I eventually moved onto the trading desk in 1988.  I stayed at GS until 1996 and then ran Global FX options for Lehman.  Since 2001 I have worked at hedge funds running strategies that feature volatility as an asset class.  I have been at FX Concepts for three and a half years.  My role is Head of Investment Research as well as Portfolio Manager for our Volatility Product.

FXTM

What do you particularly like about your job?

RDR

I’ve always enjoyed the changing nature of the markets.  I sit at my desk every day and a new set of tasks emerges based on market movements. This was never the case in the engineering world. We worked on projects that lasted months or years, certainly not days or hours. I am immersed in macroeconomics, politics, and international finance, while still utilizing the many of the quantitative skills I learned back in the engineering days.

FXTM

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

RDR

The relative nature of foreign exchange makes it unique from other asset classes.  Technically there is no natural asset, unlike equities or bonds.  Instead, all plays are relative value plays betting the strength of one economy versus another.  A challenge for players in FX is finding diversification.  With only 30 currencies to trade versus tens of thousands in the equity world diversification is our biggest challenge.

FXTM

When and how was the company born?

RDR

FX Concepts was started in 1981 by John Taylor as a firm that primarily provided research to institutional clients.  From there he began managing money for clients in 1987.  John is still CIO and is very visible both inside and outside of the firm.

FXTM

How is the company structured today in terms of headcounts and offices?

RDR

We have approximately 50 professionals.  Most of our employees are located at our headquarters in New York.  We also have offices in Bermuda, London and Singapore.

FXTM

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

RDR

Since we employ systematic strategies, the key to our success lies in our research group and our IT department.  They are the core of the engine that drives the firm.  Obviously risk management is extremely important as well and our CIO oversees overall risk for the firm. 

FXTM

Which authorities regulate the company?

 

RDR

Since the company primarily trades OTC FX forwards and options, we are regulated by the SEC in the US and the FSA in the UK.  Any futures activities are governed by the NASD and CFTC in the US.

FXTM

You are in charge of the currency program. How do you describe your investment strategy?

RDR

Our strategies are systematic in nature.  We have one strategy that is purely directional, one relative value volatility strategy, and one strategy that blends the two.

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?

RDR

Well our strategies were originally created in 1987 and have evolved from a single model that traded momentum only, to then combining momentum with carry, to where we are today which is much more sophisticated.  We use a blend of strategies that combine different methodologies with a risk management overlay.  Over the years we have noticed that certain methods work well for particular market environments, but not others.  We feel a blend of models with tight risk management around each model allows us to best adapt to different market conditions.

FXTM

How do you manage risk in the company?

RDR

At the lowest level, we manage risk in our models.  Each model targets a specific standard deviation and many of them have internal stops on positions.  More importantly, we have a stop loss on a per model basis that acts as a drawdown control.  The exact same stop is used on all models just like a large discretionary shop may have defined trader drawdown limits.  Our CIO and risk committee manage the overall firm risk at a portfolio level and do so using a discretionary overlay when appropriate.

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?

RDR

It is difficult for us to target a specific trade as we run too many strategies for one trade to have a significant effect.  However, for example, in the past we relied heavily on mean variance optimization for all of our models.  We have since found that optimization tends to concentrate risk and have moved away from that approach.  A small percentage of our models still do incorporate optimization methods but we are careful to not completely rely on that approach.

FXTM

What kind of strategies do you use?

RDR

We use a blend of strategies with different styles.  Momentum, Carry, Fundamental based models, and relative value options strategies.

FXTM

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

RDR

Good trending markets in the direction of carry (risk on) always have favored our strategy in the past.  However, since our mix is much more diversified that is less the case going forward.  Markets like 2011 where there was no trend and our markets switched from risk on to risk off very quickly were difficult for us and for other FX based strategies.

FXTM

Can you give us an example of a memorable winning trading decision?

RDR

It is not a specific trading decision but in the second half of last year, we made a deliberate move to allocate to models that are not correlated to trend or carry.  Between central bank interventions, and low interest rates those strategies have underperformed.  Our new models have behaved well and have added some nice diversification to more traditional trading models.

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?

RDR

Emerging markets currencies are a very important part of our portfolio mix.  They provide significant diversification for our models and have proven to be a source of alpha for us.  For an individual trader using emerging markets is a bit tricky.  Without a top down understanding of the fundamentals behind an EM currency it is difficult to allocate a significant portion of risk to that currency.  Given limited resources, an individual may not be able to achieve enough diversification to limit the effect of an unexpected dislocation in that particular market.

FXTM

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

RDR

We have a high priority on all of the above.  Our researchers are focused on building models with good entry and exit signals, while most of the money management is performed outside the model at the portfolio level.

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 that became profitable again after a long negative phase?

RDR

Drastic changes, like the crash of 2008 can alter how models fundamentally work.  Some models that worked well prior to 2008 no longer perform consistently, while others that never worked prior to 2008 have performed well since then.  There are fundamental reasons for these changes.  Central banks have had more involvement in controlling volatility over the last few years.  That is a major reason that some models no longer work well.  Drastic dislocations like the one we saw in 2008 are few and far between, but one can separate those types of events from normal market ebbs and flows.

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?

RDR

As I mentioned earlier, most of our models no longer use optimization.  I don’t have anything specifically against optimization techniques.  Optimization tends to concentrate exposures to currencies that appear on the surface to be less risky, but when a dislocation event occurs and correlations increase the portfolio can be much riskier than it would have been without optimization.

FXTM

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

RDR

We try to vary the frequencies we use in our models.  It is yet another form of diversification.  Our average trade duration is anywhere from one week to a few months depending on the model.

FXTM

What should an inexperienced trader watch when choosing a time frame?

RDR

One should be able to simulate a model over different time frames and not see significantly different results. It is one of the robustness tests we perform on all of our new models.

FXTM

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

RDR

The average leverage in our portfolio is about 100%. Our leverage has come down significantly over the last few years because of the added volatility we have seen in the markets. Our maximum leverage is 500% but we rarely get close to that.

FXTM

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

RDR

We use over 20 execution brokers.  Most of our spot trading is electronic, at least in currencies that have sufficient liquidity to allow electronic trading.  Our options trading and illiquid currencies are handled over voice.

FXTM

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

RDR

We have our own proprietary databases for daily, intraday, and volatility data.  Data collection and analysis is extremely important to us, and we take great care in assuring the accuracy of our data.

FXTM

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

RDR

We have a proprietary infrastructure for all of our internal functions.  The infrastructure has been built over several years and now contains everything from simulation tools to front office risk management to operations applications.

FXTM

Which opportunities and risks do you see in ultra-high frequency trading for FX managers?

RDR

I think the latency game is over in general. We never were part of it in the first place.  We do believe there are opportunities in the medium frequency spectrum, trades that last a few hours to a few days.  This is an ongoing part of our research.

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?

RDR

Liquidity is not a problem for us in most currencies.  However, there are some EM currencies where we must set limits that are very conservative.  We do this because liquidity in EM is something that is there when you don’t need it, but when you need to exit a position liquidity is never to be found. 

FXTM

What is the biggest strength of your team?

RDR

The major strength for us lies in our research process and infrastructure.  Each of our researchers is focused on a model or a set of models that has a low correlation to the existing portfolio.  We watch those models for an extended period of time on an out of sample basis, carefully tracking any changes that are made.  We can compare how models behave relative to other models or to previous versions of the same model.  We also allow our researchers to have a voice in each other’s work through our Product Development Committee (PDC) meetings. This is a forum where a researcher presents his or her work and others are encouraged to critique and add suggestions.  This is an iterative process so over time everyone buys in to a model by having a say in its development.

FXTM

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

RDR

Now that is the toughest question of the day!!  Hmmm, well I guess from my perspective if Greece leaves the Euro there will certainly be a kneejerk reaction to sell EUR on a contagion effect.  However, Greece leaving actually makes the Eurozone stronger in some ways and I don’t think it is likely Italy or Spain leave at all. So I would say that in either case (Greece or no Greece) the EUR will actually trade higher in 6mos time to a level between 1.3500 and 1.4500. 

FXTM

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

RDR

I take back my previous response, this is really the toughest question of the day!  I always tell people that if I were entering the workforce today Wall Street may not be the best choice. The regulatory environment that we are creeping into is making it more and more difficult to take risk.  I am a big believer in technology.  If someone were coming into this industry they must learn the technical expertise to survive in a market that is likely to be more regulated and more technologically advanced than it is today.