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FX MANAGERS

Interview with Franz W. Schmadl

Founder and CIO of OSV Currency Partners, based in Bad Homburg, Germany, and Darien, Connecticut.

fx managers risk management Franz Schmadl

In this interview Franz W. Schmadl explains the importance of risk management coupled with a very solid investment and independent decision making process

 

FX Manager

OSV Currency Partners

Strategy

OSV Currency Program

Location

USA / Germany / Switzerland

Assets Under Management

135 mln Usd

Type

Systematic fundamental modelling, discretionary decision process

Style

Spot /Forward, NDFs

Instruments

FX Spot or NDF

 Traded Currencies

Major, selected EM

FXTM

How long have you traded foreign exchange, tell us about your career evolution

FS

I started in the mid 80’s and held numerous positions in research and in asset management. Currency management was always an essential part of the investment process and I started to develop a return oriented currency program in 1997. OSV was founded by myself and other partners in 1992. After having sold the company to a large investment holding company in 1996, my partner Fred J. Gatling and I bought it back in 2007. Today, OSV Partners has a total staff of 17 people.

FXTM

What do you particularly like about your job?

FS

It never gets boring and there are new challenges every day.  There is neither rest, nor complacency possible. One has to constantly analyze the world and refine the investment ideas and positions. Interaction with clients and other players serves as much for collecting important information as well as for  personal contacts.

FXTM

How is FX a unique market?

FS

Currencies are truly global and reflect a country’s entire position versus the rest of the world. Currencies serve as a reference point for a country’s general investment rating and standing in the world. In addition currencies are the most sensitive asset to changes in the macro landscape. They are traded 24 hours and represent the most liquid market.

FXTM:

What are the key positions in FX Management company?

RS

CIO, Risk Manager, Head of Trading Executions, COO and Head of Marketing.

FXTM

Which authority regulates OSV Partners? Do you keep and update a compliance and risk management policy? How time consuming, and how important, is it to satisfy regulation requirements on one side and internal procedures on the other?

RS

We are regulated by the CFTC and NFA. Impeccable compliance activity and documentation is an important element in a firm’s success. Without it a firm cannot exist. We at OSV put great emphasis on transparency, independent third party valuation and independent holding of client assets.

FXTM

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

FS

Our investment style is discretionary. We use a theme driven, macro top down research process, focusing on the most attractive fundamental / technical constellations between various countries and/or regions. This strategy is the result of more than 20 years of life work and research.

FXTM: Risk, an exciting yet dangerous word. How do you manage risk?

FS

 Risk management is one of the cornerstones of our successful currency program. We place big emphasis both on our risk management and our systems. The reward is a very attractive gain/loss ratio and strong long term performance.

FXTM

What’s an example of the kind of trade that added value to your learning process?

FS

The biggest value from this learning process is how to trade and manage a loss profile. Losses and loss trades are an essential part of every investment strategy. The key difference is how to trade and manage your loss profile. During the Russian crisis we closed out all our US Dollar short, only to see the markets collapse right after it. Would we do it again? Yes, because it was the result of our risk management discipline.

FXTM

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

FS

Our investment process is screening the world in a comprehensive way. Diversification is entering our process through the selection and de-selection of trades. Within the portfolio we believe that concentration can add value while still maintaining a proper risk profile.

FXTM

How do you think your performance has been over time? What market conditions are expected to have a positive and negative impact on it?

FS

Overall excellent, our clients have made money over time. We had a dry period in between, but that is over with last year’s performance of almost +40%.

FXTM

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

FS

USD/JPY short in 2008 is a good example. Also, the rise of the Dollar against the emerging market currencies during the last quarter in 2008.

FXTM

Do you use less mature currencies, or do you plan to add them to your studies and trading? Or do relative lack of liquidity and wider dealing spreads outweigh any potential gains from being able to capture more inefficiencies?

FS

Our trading focuses primarily on EUR/USD and USD/JPY. These are liquid, low spread relations that can be traded intraday as well as for strategic positions. Less mature currencies are better suited for longer term structural positioning, while trading them in the short term gets diluted over time through the spreads. For this reason, I would not suggest individual traders to trade them.

FXTM

When developing strategies how approximately would you expect to allocate your time among building entry signals, exit signals and money management rules, and how much time will you allocate to further research?

FS

Our investment process is very disciplined. Within the entry/exit strategy a well defined loss/risk management procedure basically takes care of all decisions. Entering a position is a function of risk tolerance, volatility expectation and the impact of this particular trade for the rest of the portfolio. Exits are a result of hitting profit targets or loss limits and volatility based portfolio adjustments. We are a discretionary firm that reacts to a changing environment. It is clearly important to consider volatility changes and to assess on an ongoing basis the fundamental environment. If it changes it is likely to have an impact on the portfolio. And also, we are a research driven firm and we allocate a significant amount of time to research. There is no one set system that works forever. It is essential to have a well defined discipline of risk taking and loss cutting. Without that you will go under.

FXTM

Do you favour any particular time frames in your strategies, or do you diversify across a range of them? What is your average trade duration, and how is high the trading frequency?

FS

We believe there is value in both short-term and long-term trading strategies. Short-term trading can be of high frequency, ranging between intraday to a few days.  Strategic positions are targeting time frames of up to a year. It is quite important not to mix up the activities of these two areas. For example, strategic positions are not really qualified to be traded and vice versa.

FXTM

What are your average and maximum leverage used?

FS

Average is around 1.25 times capital and maximum can go to as high as 5 times.

FXTM

How many execution brokers do you use? How do you split execution between electronic and “dear old voice”?

FS

We have six execution brokers on the boxes, but electronic execution constitutes 70% of all trades.

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?

FS

Our strategy can accept a lot of assets. We currently have in place an infrastructure that can manage assets in excess of one billion US Dollars.

FXTM

What is the single biggest strength of your team?

FS

Experience and quality risk management coupled with a very solid investment and independent decision making process.

FXTM

At FXTM we say it’s more important to plan and know how to react than forecast, but can you give us your feeling about the most popular, EURUSD, over the next 6/12 months.

FS

That will be a hard one. Since the key drivers for the EURO are resting with the outlook for monetary policy and the action of the ECB much will depend on their assessment of activity. As we, like everyone else, don’t know about what they will do – the decision to forecast EUR/USD is not tied to fundamentals like growth differentials, yields, etc. but to the assessment of how strong the ECB will push rates lower or even go quantitative. Additionally, I believe the U.S. in the long run needs a lower Dollar and will produce one. That said, I expect US Dollar weakness to set in, but not before the ECB has decided on its quantitative easing.

FXTM

What’s the best advise to give to an inexperienced or semi professional trader who wants to enter the FX fund management industry?

FS

Start as short-term as possible and have tight stops. If possible, sit next to a very experienced person. Learn by watching and how to avoid mistakes. That’s key. Be prepared to deal with your losses and deploy a proper risk management system before you start. That will keep you out of trouble and alive to benefit from your good trades.