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FX MANAGERS

Interview with Ante Basic

Founding Partner at Trigon Investment Advisors

fx managers majors volatility Ante Basic

Ante Basic tells us about Trigon’s Foreign Exchange Strategy - a systematic strategy that aims to profit from volatility in selected major, dollar-block and emerging market currency pairs. He also tells us how the company implements three levels of risk control for the Foreign Exchange Program.

FX Manager

Founding Partner at Trigon Investment Advisors

Strategy

Trigon FX Program

Location

New York

Assets Under Management

FX Program $127 million (Firm $580 million)

Type

Short to Medium-Term Systematic

Style

Breakout

Instruments

Spot FX and Forwards

Traded Currencies

Majors, Dollar-block and Emerging

FXTM

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

AB

During college I was fortunate to land a part-time job on the American Stock Exchange performing programming and back office functions for a few independent equity options traders. My market knowledge was limited at best but I quickly grasped the quant side of the business.  It didn’t take me long to decide that this was something I wanted to pursue so I switched my major from engineering to finance.  I have been trading foreign exchange since the early 1990s after joining the Chase Manhattan Bank and completing their Capital Markets Training Program. I worked at Chase from 1990 to 1996 in the Global Trading Strategies Group where my responsibilities included portfolio management and research and development of systematic and quantitative trading strategies. After Chase I co-founded Global Capital Market Strategies, a consultant and CTA where I continued trading foreign exchange. In 2000, I joined a family office where I ultimately met my current business partner, Paul Mastroddi. 

FXTM

What do you particularly like about your job?

AB

My partner and I have spent our entire careers in markets-related environments and we find them intellectually stimulating.  Over the past 10 years, we have had the opportunity to own and manage our company and this has brought a new and rewarding dimension to our interest in trading.

FXTM

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

AB

Many currencies (the majors and the dollar block especially) are among the most liquid of financial instruments, trading with high volumes and narrow spreads between bids and offers around the clock. This helps both to keep down transactions costs and to enhance risk control by minimizing gaps in price movement.  In addition, currencies often march to their own drummer, with the asset class as a whole sometimes exhibiting little correlation with other asset classes.  Also, individual currencies frequently trade independently relative to one another.  Over the past six months, for instance, country-specific drivers have led the Japanese yen, the Brazilian real and the British pound to move independently of other currencies and asset classes.  Of course, there are times when financial markets become riveted on a single event, such as the European sovereign debt crisis, and correlations rise very sharply.  But during normal times, currencies often trade with some independence.

FXTM

When and how was the company born?

AB

Trigon was established in 2002 by me and my partner, Paul Mastroddi. Paul and I first met about 2 years before that when we co-managed a portfolio for a family office. Paul is an economist by training with a PhD in economics from Yale and was a Managing Director and Chief U.S. Economist for JPMorgan for over 10 years. Paul was ranked as one of the top economists on Wall Street by both Institutional Investor and Greenwich Associates during his years at JPMorgan.  Prior to meeting me, Paul managed money at both Omega Advisors and Moore Capital.  Paul and I each brought unique skills to the family office which later enabled us to launch Trigon. Our time at the family office was rewarding and valuable.  Our experience there helped us launch Trigon in 2002 with seed capital from the family.  We chose the company’s name to highlight the three strategies that we trade: a systematic strategy that is used in our FX Program and two discretionary strategies that we offer in our Discretionary Macro Program. Today we manage approximately $127 million in our FX Program and approximately $450 million in our Discretionary Macro Program.

FXTM

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

AB

We have a relatively small, tight knit organization of 7 people located in downtown New York.  In addition to my partner and me, who are the Portfolio Managers, we have one trader, a three-person operations and accounting staff, and one business development person. We also use technology consultants and third party service providers in the areas of legal, accounting, audit and administration.

FXTM

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

AB

You may think that my answer is too simple but I would say that all positions are key. While it all starts with my partner and me as the Portfolio Managers, trade execution, compliance and operations personnel are critical in the success of our organization while Marketing & Business Development is important in communicating with our clients.

FXTM

Which authorities regulate the company?

AB

Trigon is a member of the National Futures Association and registered with the Commodity Futures Trading Commission as a Commodity Trading Advisor and a Commodity Pool Operator.

FXTM

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

AB

The Trigon FX Program (FXP) allocates 100% of capital to Trigon’s Foreign Exchange Strategy, a systematic strategy that aims to profit from volatility in selected major, dollar-block and emerging market currency pairs. The model we employ in the strategy includes two modules, a short-term one with average trade duration of about three days and a medium-term one with average trade duration of about three weeks.  This allows the model to potentially profit from both trend and countertrend price action.  In both modules, the model utilizes a proprietary volatility valuation methodology to rate volatility relative to its historical norms. The model enters trades only when volatility is deemed to be in a value zone – this leads to larger position size for a given amount of risk.  The theoretical underpinnings of the methodology are that volatility is mean-reverting and directional trading systems effectively replicate long positions in options.   Individual positions each have a limited loss governed by a trailing stop but an unlimited profit potential. Drawdowns in this context can be viewed as equivalent to time premium. We view the primacy of the volatility analysis in our model as key to addressing the issue of drawdowns (the volatility screen, in our view, improves the risk/reward of the model’s trading).

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? 

AB

The theoretical underpinnings of the model that we use today in the FX Program date back to my years at the Chase Manhattan Bank in the early 1990s and I have been working on the model continuously since then.  Research and diagnostic studies are an ongoing process to understand the Program’s performance attribution as well as to guard against structural degradation.  Changes are implemented only infrequently when structural weakness are identified through diagnostic analysis and not though optimization studies.  There have not been any major changes to the Program over the last decade.

FXTM

How do you manage risk in the company?

AB

Risk management is absolutely the key to long term success for any money manager. We know our systems work but we also know that there will be periods where the market environment is not conducive to our methodology and thus the key is to control risk.  We implement three levels of risk control for the Foreign Exchange Program. First, at the portfolio level, open positions are monitored so the maximum drawdown for the entire program in a crisis scenario (all stops are elected in a 24 hour period, bringing the portfolio to all cash) is strictly limited. In addition, maximum leverage is limited, providing a second layer of risk control at the portfolio level.  Second, risk is distributed between the model’s medium-term and short-term components.  These two components have a low correlation over time.  And third, at the trade level, positions are volatility-weighted to limit the risk to the portfolio from any one position. The system uses trailing stops which are adjusted daily. On average, the risk per trade has tended to be a bit under 50 basis points.  Risk control does not stop with the Program’s trading rules.  Sound trade execution and operations as well as contingency planning are exceptionally important.  We have developed procedures to address these issues and continually reexamine them. 

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?

AB

While there have certainly been losing periods in the past that I wish we had not incurred, as a systematic trader all of our trades are determined based on the model so the losses were not a result of a “wrong” decision.  One lesson I have learned is to resist the temptation to tinker with the model during a losing streak since ups and downs are a normal part of systematic trading.  In addition, I never try to “cherry pick” trades since the Program is 100% systematic in its choice of entry and exit.

FXTM

Do you use a blend of strategies or one only?

AB

I would say that our model is a single strategy by definition but has two components that focus on different time horizons.

FXTM

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

AB

Our model tends to perform best during periods of cycling volatility (which is typically produced by consolidations followed by breakouts in price).  Trends help the medium term component excel but the short-term module can prosper without trends as long as there is some price consolidation followed by a few days of rapid price acceleration.  The toughest environment for the model is one of a steady grind down in volatility.  Another difficult setting for the methodology is when the correlation among currencies increases dramatically, reducing independent price movement.  Over the past 12 years we have seen strong performance from the FX Program during periods like 2001-2003 and from 2008 to now, times when volatility was normal to high compared to stretches like 2004-2007 when volatility declined steadily and ultimately fell to historic lows.

FXTM

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

AB

Our best trading decision was probably our choice to stick to the long-term plan and resist making changes to the model during the several years of slightly negative performance in the mid-2000’s.  Volatility in foreign exchange fell steadily from 2004 through mid-2007, reaching a record low.  This environment was challenging for our methodology since trends were scarce and even short-term trading was difficult.  We viewed the volatility drop as temporary given that volatility has strong mean-reverting properties even though it lasted far longer than we had anticipated.  Our diagnostic studies as well as our qualitative assessment confirmed no structural changes to

indicate that a long-lasting shift to a new volatility regime was under way.  In addition, the industry was having similar and even worse difficulties.  When volatility returned starting in mid-2007, the model performed as it was designed to do and it had a very strong run, including 2008’s 25% gain net of fees, rewarding our decision not to alter the model.  We believe it is very important for our methodology to provide predictable outcomes for our investors.  The environment that started in mid-2007 is one in which our investors would have expected our FX Program to deliver better results and we are gratified that it met these expectations.  Our commitment to guarding against hasty changes to the model’s methodology, of course, does not preclude us from making alterations if our regular diagnostics indicate they are clearly necessary.

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?

AB

Our FX Program trades a fixed set (ten) of currency pairs including two Emerging Market currencies, the Singapore dollar and the South African rand.  Liquidity has improved dramatically in some Emerging Markets currencies over the past decade.  We continue to monitor the benefits of adding additional currency pairs, taking account of both market conditions and liquidity needs associated with the size of assets under management. 

FXTM

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

AB

Entries, exits and money management rules are all important.  But we elevate money management rules above all else.  Profitability is the ultimate goal of investment programs, of course.  But guarding against outsized daily volatility and unacceptably large peak-to-trough drawdowns is of paramount importance, in our view.  Limitation of drawdowns allows winning streaks to lift performance to new highs.  For instance, our Program was not far below its high water mark at the end of the mid-2000s period of underperformance, allowing it to break to new highs in terms of investment performance quickly in 2008.  We expect our model to perform better in some market environments and worse in others but in all environments we view predictable daily volatility and drawdown cycles to be more important than entries and exits.  We believe our Program’s three levels of risk controls accomplish this.

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?

AB

There are definitely periods where our model doesn’t perform as well but I would not call it losing its accuracy. I think investors often think that strategies lose their accuracy when they are not providing positive results but as a systematic trader, regardless of your model, you will experience periods during which it doesn’t seem to be working.  Our model is based on a basic theory and non-optimized specifications that have the capacity over time to adapt to changing market conditions and we would expect it to be robust over the long haul.  I think the key to a long term relationship with a client is education and communication. As a systematic trader, our model is based on a set of rules and so if the client has a general understanding of our rules we become somewhat predictable.

FXTM

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

AB

As I mentioned, our model is comprised of two components that focus on different time horizons. The short-term component has average trade duration of three days and is designed to profit from brief bursts of price movement and counter-trend moves whereas the medium-term component is designed to participate in sustained price trends and has an average trade duration of approximately three weeks. With regards to our trading frequency, our FX Programs makes about 200 trades annually or approximately 1000 round turns in IMM equivalents.

FXTM

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

AB

Any time frame can be successful as long as the system is soundly designed and its properties are well understood.  Our main advice to an inexperienced trader would be to build a system that is consistent with your tolerance for risk.  Some people can stomach large drawdowns and significant daily volatility but others are more averse to such swings.

FXTM

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

AB

The margin-to-equity ratio for our FX Program can range from 0 to 20% with an average of approximately 10%. The model will utilize a maximum leverage of four times with an average of approximately two times.

FXTM

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

AB

We currently use 9 executing brokers, including major banks.  We split our executions based on our assessment of market liquidity, dealer execution performance and size of order. 

FXTM

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

AB

Good data is critical in model building.  The data must be accurate and without gaps.  When I started my research in systematic trading in the early 1990s, good data was hard to come by and expensive.  The construction of a database was a time-consuming endeavor and the raw data usually required extensive “cleaning up”.  Now, good databases are both relatively inexpensive and common. 

FXTM

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

AB

For research and risk, we use Visual Basic, excel and various data services such as Bloomberg.  Trade reconciliation has always been automated and we use a software module by MHedge to reconcile trade details with clearing brokers. 

FXTM

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

AB

We are not focused on the ultra-high frequency space.

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?

AB

Liquidity is unlikely to limit the growth of our program since foreign exchange tends to be one of the most liquid of asset classes.  In addition, the Program could be expanded to trade a greater number of currencies if required due to a sharp increase in average trade size related to growth in AUM.  We believe we can trade up to $500 million in our FX Program without any major changes in infrastructure.

FXTM

What is the biggest strength of your team?

AB

We view the Foreign Exchange Program’s edge as being: (a) a long record of positive returns with controlled volatility; (b) no style drift; (c) the use of a volatility indicator, which makes trade initiation more selective; and (d) the use of both short and medium term trading modules to enhance the ability to be profitable in various trading environments.  Our team is experienced and turnover is low.  We have a long history of working together.  My partner and I have traded together since 2001 and this has enabled us to learn from each other and become interchangeable in running all aspects of the company.  In addition, two of our staff have been with us since 2004 – 05 and the rest have each been on the team for nearly three years.

FXTM

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

AB

Our views enter into only our Discretionary Macro Program since the FX Program is fully systematic.  In the DMP, our strongest view at the moment relates to the yen, which we expect to depreciate.  While we are not positioned in EURUSD in our discretionary trading, we expect this cross to move against the euro in coming months as Europe’s economic underperformance weighs on the currency.  Over the past year, Europe’s economy has contracted while the U.S. economy has grown.  But the impact of Europe’s recession on the euro has been muted by the European Central Bank, which has been fairly hawkish relative to Europe’s dire economic circumstances.  The Federal Reserve, by comparison, has been very dovish relative the performance of the U.S. economy.  A move in the EURUSD cross would require a shift in the stance of one of these central banks and a more hawkish Fed seems the most likely candidate.

FXTM

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

AB

There are many ways to get started in this business.  I can say that both my partner and I started at major banks and we both believe that this tends to provide an intense and broad introduction to the markets from experienced and highly trained professionals.