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FX MANAGERS

Interview with Titus C. Schloesser

Head of Alternative Investments at Portfolio Concept

FX manager Titus C. Schloesser

Titus C. Schloesser talks about the company’s strong experience in the markets, the importance of a reliable and committed team, and explains how they developed a successful proprietary intra-week break-out strategy.

 

FX Manager

Portfolio Concept Vermögensmanagement GmbH

Strategy

Advantage FX systematic

Location

Cologne, Germany

Assets Under Management

EUR 300 million

Type

Systematic

Instruments

Spot and forwards

Traded Currencies

Majors

FXTM

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

TCS

Portfolio Concept has, since its inception, been an active player in the growing German alternative investments market. Starting in the mid ’90s, we began to specifically also focus on systematic trading in the futures and forex markets. As to me personally, I was attracted to the financial markets at an early age and therefore decided to study in the U.S. at Bentley University, a school with a strong finance program. Upon returning to my native Germany, I was fortunate to have a range of experiences in different financial market environments, starting with wealth management with traditional financial instruments and later moving to alternative investments, where I specialized in systematic approaches to generate value for clients, particularly in the FX markets. I have been closely involved with FX trading since 2008.

FXTM

What do you particularly like about your job?

TCS

I find the “people” aspects particular challenging – and rewarding. On the one hand, I have to interact with people on the product side: We have to develop winning strategies, successfully execute and trade in the markets and are in contact with financial engineers of investment banks to offer innovative products. On the other side are the investors, where not only performance but also communication is vital. Building the “bridges” between these different sides, and seeing the payoff from good communication, is particularly gratifying for me.

FXTM

Which other interests do you have outside work?

TCS

To exercise sports is important to me and gives me a rewarding balance. I play field-hockey and enjoy a round of Golf every now and then. When I have less time I go running or on a walk with my two dogs. In all those activities I win a little distance to the financial markets which is important as well.

FXTM

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

TCS

Many financial instruments essentially have “risk-on” and “risk-off” modes, meaning that their behavior is somewhat predictable. That’s definitely not the case when trading multiple currencies, which makes it much more complex and challenging. In addition, currency markets are affected by a broader range of factors than those affecting traditional financial instruments.

FXTM

When and how was the company born?

TCS

Portfolio Concept was founded in 1984 by my father, who today remains President of our company. He had a background in derivatives trading, and his idea back then was to offer German clients access to the U.S. markets even in the after-hours, when German banks were closed. As its success grew, he began to also offer asset management solutions and realized that there were better ways to navigate through, and take advantage of, the financial markets. That’s when the company started to look for systematic strategies. After several years of experience with strategies of external managers, Portfolio Concept began, starting in the late ’90s, to develop its own in-house strategies, which have proved successful.

FXTM

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

TCS

Today we have a staff of 16 at Portfolio Concept split in two distinct businesses: Wealth Management and Alternative Investments. I head the latter part, with four experienced colleagues in my team. As a company subject to stringent regulation, we also have an in-house compliance officer as well as our back office.

FXTM

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

TCS

The key to success is not only having a successful strategy – and developing new hopefully successful strategies – but having a reliable and committed team. Although we talk about “systems” a lot, it’s ultimately our people that make the difference. I am particularly fortunate to work with traders who understand the signals generated by our strategies and who are able to detect quickly if something isn’t going quite as planned – and can react accordingly. Some of my team members have been with the firm for as many as 20 years.

FXTM

Which authorities regulate the company?

TCS

We are regulated by BaFin, the German Federal Financial Supervisory Authority.

FXTM

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

TCS

Our flagship strategy, called “advantage FX systematic”, is an intra-week break-out strategy. The program aims to identify break-outs on the basis of certain characteristic price patterns. The system also uses various independent volatility filters so that we don’t trade in unfavorable market conditions. Only when all of these give a green light, and when the opportunity exceeds the risk, is the signal sent for execution.

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?

TCS

The logic behind the advantage FX systematic strategy was originally based for trading futures markets. Since the inception of the FX strategy in February 2008 the signal trigger has not changed. We have, however, made improvements over time on the risk management side – firstly, to better account for changes in the liquidity in the various currency pairs, and secondly, to better react to changes in intra-day volatility.

FXTM

How do you manage risk in the company?

TCS

Risks are managed at various levels. An important and easy way to manage risk is, of course, through diversification. For this reason our strategy first splits the portfolio into 18 equally weighted parts, with each part representing a particular currency pair and time frame. In addition, the strategy imposes a strict stop-loss on every position which is taken, which is continuously adjusted. Operational risks are also something which we take seriously, with thorough and well-documented operational procedures to protect against these. For example, should there be an IT failure, we can operate the entire portfolio management process from back-up servers.

FXTM

Do you use a blend of strategies or one only?

TCS

The advantage FX systematic strategy from Portfolio Concept is, in principle, a single strategy. However, because it is applied to multiple currency pairs the program is a diversified portfolio.

FXTM

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

TCS

The ideal situation for us is a market that trends for at least two to three days. The most challenging environment, is the reverse of this: markets with high intra-day volatility but without any significant trend. Unfortunately we have seen quite a number of these days in the past 12 months.

FXTM

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

TCS

To be clear, our trading signals are always generated by our program. We follow a pure systematic approach, so the decisions never originate from a portfolio manager. That being said, one of the most rewarding and therefore memorable trades I can recall was a EUR/CHF short trade last year, when the euro and Swiss franc were close to parity. We held the position for about three weeks, much longer than the usual day or two that we might hold a trading position.

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?

TCS

We do not presently use emerging markets currencies for our strategy, in large part because the trading costs involved. Although we look at spreads and liquidity on a regular basis, it is rare that this analysis actually leads to the addition of a new currency pair. However, I have no doubt that we will identify new currency pairs in the future which fit with our strategy.

FXTM

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

TCS

Our general approach is first to test and validate entry signals. We use stability tests to determine if an entry signal holds up under several different exit scenarios, with the position closed out after different time intervals or at different fixed profit levels. If, after this careful testing process, we decide to proceed with an entry strategy, we then chose and adapt from among our various established and proven exit strategies. The choice of exit strategy is based largely on the characteristics of the entry – whether it is a breakout, a swing or contrarian. It is ultimately getting the right balance between entries and exits which leads to a complete and successful strategy.

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?

TCS

Our aim is to develop strategies that deliver returns across a wide range of currency pairs, time frames and market environments. To achieve this, our approach is to focus on strategies which are relatively simple but therefore highly robust. We are always careful to avoid the common trap of optimization, but we sometimes have to accept drawdowns in a single underlying market or currency pair. We, like other FX traders, know that the market behavior of a particular currency pair can change over time. We have seen time and again that a currency pair where we for a time enjoy great success later became a poor performer, and vice versa. We therefore concluded that a good strategy may well lose traction in a single market but still shows solid performance for a portfolio of different low correlated markets or currency pairs.

FXTM

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

TCS

We try to find our edge between high frequency trading on the one hand and trend following approaches on the other hand. Our strategies mainly base on 30-180 minutes bars. Positions are held between few hours and several days. The trading frequency for a single currency pair differs from one to five round turns per week.

FXTM

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

TCS

A trader needs to find time frames that allow his or her algorithms to react to significant price movements. In recent times, we’ve been in a market environment where we can see dramatic price jumps in even just a few minutes. This means that traders – including those of us here at Portfolio Concept – must think in terms of lower bar sizes than those that we used in the past.

FXTM

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

TCS

Typically our clients determine the degree of leverage according to the risk level that they are willing to take. In our experience to date, this has meant leverage ranging anywhere between 0.5 and 2.5.

FXTM

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

TCS

For our flagship strategy, advantage FX systematic, we use Deutsche Bank as our prime broker. We have invested into technology so that our trading algorithms can, using the API, directly interact with Deutsche Bank’s autobahnFX platform. We prefer automated trading – not so much because of execution speed but because it avoids human error. The role of our experienced traders is primarily to supervise this automated trading and to closely monitor the strategy.

FXTM

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

TCS

In the Forex market we consider a few data sources as “reliable”. We use market data from different sources, including Deutsche Bank, Interactive Brokers and others. As Forex is traded primarily OTC there is no definite correct price as on exchange traded products. Because of the importance of back testing, we use multiple data sources and then compare the results. Also accurate price data becomes more critical as trading frequency increases and we are not in the most active trading range.

FXTM

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

TCS

We use MatLab to analyze overall portfolio risks and to manage the overall FX portfolio. We also use various quant trading software products for both back testing and our actual trading.

FXTM

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

TCS

That’s a tough one. We aren’t in a position to say whether the growth of UHFT presents significant new risks for other market participants. It is clear, of course, that we have seen some very significant changes in market behavior over the past months and years. The extent to which this may be the result of ever more and faster high frequency trading is unclear. What is clear to us, that managers who rely on UHFT must fight a constant battle to have the leading edge of technology.

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?

TCS

Market liquidity has, until now, never been an issue for us. And should it become an issue we can easily trade additional time frames or add currency pairs to diversify our entries. We could grow at least tenfold before liquidity begins to have an impact – and when we do, I am sure we will find an adequate solution.

FXTM

What is the biggest strength of your team?

TCS

The biggest strength of our team is, in my own opinion, the reliability and experience – both among the individuals within our team, and in the team as a functioning whole. Also, our lean structure serves us well and allows us to act quickly and efficiently in ways that large institutions often cannot.

JFXTM

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

TCS

Besides the imperative nowadays of defining and rigorously implementing risk management, and avoiding the trap of optimization, I think it is a good idea to play to one’s strengths, as both an organization and as an individual. If you’re a good trader, focus on trading. If you’re a good programmer, focus on programming. If you instead find yourself going out to clients to raise assets, you’re not doing what you do best.