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FX MANAGERS

Interview with Garen Ovsepyan

Portfolio Manager and  Managing Director SHARPE+SIGNA LLC

fx-managers-simplying-risk-management Garen Ovsepyan

Garen Ovsepyan talks about the challenges and opportunities that Forex trading offers, and how Sharpe+Signa’s strategy, which includes technical analysis, fundamentals, market intelligence as well as some quantitative analysis, is implemented in a fully discretionary way. He explains that the main strengths of the company are the diversities and complementarities of the trading team, as well as the capacity to simplify the risk management process. 

 

Strategy

SHARPE+SIGNA Managed Currency Series

Location

USA, UK, NZ

Assets Under Management

$140MM

Type

Discretionary

Style

Market Neutral

Instruments

FX

Traded Currencies

G10 & EMFX

 

FXTM

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

GO

I originally started working in FX in 2002 as a research associate. I helped setting up and managing a prop desk here in the LA area, managing money for UHNWI and some wealthy families in the Middle East and Asia. I subsequently received a small allocation and proceeded to focus on managing and trading my own portfolio. After about a year and half, in 2004, I realized my personality was best suited for medium/longer term trading, an approach I’ve since remained faithful to.

FXTM

What do you particularly like about your job?

GO

I love the fact that no two days are ever similar to each other. Every day presents unique opportunities and forces you to look at the markets in a different way. What worked in the past is definitely not guaranteed to work in the future. You must be always alert, flexible, and ready to expect the unexpected.

FXTM

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

GO

When trading currencies, one can find opportunities at all times. Currencies are truly a “global macro” strategy in that a skilled manager must be always aware of what’s going on in every single world’s economy. In equities, or even certain commodities, one or two factors may influence price action. Currencies, on the other hand, are fully interconnected and influencing one another.

FXTM

When and how was the company born?

GO

We launched SHARPE+SIGNA in June 2010 under the name of Vanguard Axis. After testing out and trying to work with several other traders, I finally settled on the team we have here now. In August 2012, we decided to rebrand ourselves as SHARPE+SIGNA. We wanted to be unique and avoid any confusion with other firms with similar names. We wanted to cement our identity in the industry as the “vanguard” for many years to come.

FXTM

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

GO

We have 12 employees, of whom eight are in research/trading/risk, three in sales and marketing and one in back office/admin. We have offices in the US, UK and NZ. We are working on a Singapore presence, and possibly NY.

FXTM

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

GO

Risk Manager without a doubt. I think that a strategy can be profitable and sustain itself through any market condition so long as risk is properly managed.

FXTM

Which authorities regulate the company?

GO

We are 4.14 Exempt CTA, meaning we can only take on certain types of clients.

FXTM

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

GO

I would say that we are evenly balanced in our approach. When selecting positions to include in our portfolio, we analyze everything at our disposal; this means using technical analysis, fundamentals, market intelligence as well as some quantitative analysis. We do not have one box we try to fit our strategy into. This gives us the ability to remain agnostic in particular towards any particular currency pairs we trade on an intra-day basis. Simply put, right now it’s not important to me whether EURUSD trades at 1.40 or at 1.30 by year end. Our goal is to focus on the next 50-100 ticks on intra-day basis. We are interested in on what is going to trigger and sustain a move during the time frame of our trade, which is right here right now. Many different factors can and will influence the way we look at the market.

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?

GO

The overall development and evolution of our strategy has remained fairly consistent since the inception of our firm. This is also the result of the stability in personnel of the team behind it. We have four senior individuals, including myself. I am a more medium/long term trader. Richard Campbell and Richard Shennan are both former bank traders and thus take majority of our intra-day positions. Amit Patel combines both a short term as well as a medium/long term approach. If we look at the ideas we have traded over the last three and a half years, we’ve all balanced each other out in terms of profitability and, more importantly, diversity. Diversity is indeed the key element of our strategy: we are not static and we do not limit ourselves to one particular way of thinking and trading.

FXTM

How do you manage risk in the company?

GO

We try to simplify the process. Given our style of trading, at any given time any one of the senior individuals should be able to automatically and mentally calculate the risk! If we are unable to do that, we probably have too much risk on. This hasn’t happened yet, nor do we expect to be the case in the future. Many times, “risk managers” over complicate “risk management” in general. Yes, it may become more complex when you have 100, 1000 or more positions running simultaneously. We have anywhere between 1 to 5 trades on at any given time, with max leverage of 1.5x, and maximum allowable downside risk tolerance of 1.5% to 2.00%, so in a way, managing risk is easier. It’s all about simplifying the process. Historically, the average risk we have on at any time has been about 0.30% to 0.40%. The average trade risk is 0.10%.

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?

GO

I think every trade is different, so it is hard to recall a particular situation and identify it as exemplarily wrong. Every time we put on a position, we are very mindful of market conditions and whether the “trade” fits our parameters. As a result, what in hindsight turned to be perhaps “wrong” was actually correct at the time it was implemented. What I have learned however is that, when trading, a manager shouldn’t be biased towards anything in particular, especially if he/she is trading intra-day. When you become biased and naïve in your view towards a stronger/weaker USD, GBP, JPY or anything in particular, then you don’t see many of the “other” factors that are present in the market at that time and that can influence the next move. I guess, what I am trying to say is that, while it’s great to have strong convictions, being biased towards a particular move could be your strength but also your weakness!

FXTM

Do you use a blend of strategies or one only?

GO

We are definitely a blend of strategies in terms of utilizing what works best for us at any given time. Today it might be technical analysis, and tomorrow fundamentals may play a larger role in what happens in the markets. We can say the same about quantitative analysis as well as using market intelligence. Everything can be used to our benefit, if, when we are looking to take, the situation and strategy allow. We definitely try to leverage everything that is available to us when it comes to research.

FXTM

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

GO

The way we approach our trading is by remaining adaptable and agnostic in any particular market environment. Going through past experience, May 2012 was for us the most challenging month. It was a pure trending market. We were mainly trading it the way we had been during the previous 12 – 18 months. That is, we took advantage of a relatively predictable range. So when the USD became bid, for example, we kept on expecting a reversion. By doing so, we got caught on the wrong side of the market a few times. We have since put in place parameters that enable us to adjust, and more importantly help us identify certain trends. The relative inability to spot emerging trends was our main weakness back in May 2012.

FXTM

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

GO

EURCHF on September 6th 2011 definitely has to be one, only because we were on the right side of the market when the SNB announced the 1.20 floor rate for the EURCHF! We were long at 1.08, tried to get out around 1.15ish, but didn’t get a fill until about 1.19…It has been one of the few times a trader could get something like this in his favor when trading electronically. This was the first and last call about a trade I got in the middle of the night from Richard Campbell in our UK office!

The other memorable trade was the long USDJPY position we entered on September 13 & 15 of 2012 for an average long of 77.61. Our initial targets were 82, 84 and 88, which were all met. We finally got out with an average of about 100 USDJPY. This was a collective effort, with Amit Patel working under my guidance. That trade was something we had been focusing on for some time. Looking ahead at the BOJ elections and other macro elements, we had identified a great risk/reward ratio that supported the idea of taking the trade.

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?

GO

We trade them if and when an opportunity presents itself. We need to feel comfortable with the risk involved, and of course the upside potential of the reward must make sense given the potential for a loss. I think trading EMFX is better suited for longer term traders who can walk away from the position and come back to it 3,6,9 months later, and sometimes more. Macro research plays a key role in this because if you pick a country but you are not fully aware of what truly moves that market, then you are competing outside of your league. In that case, you’d be better off avoiding that position in the first place.

FXTM

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

GO

Money management rules are the utmost important factor in any strategy, followed by your exit strategy. The downside risk must always be a known factor and not something that is subjective or uncertain when entering a position. Your exit strategy will prove to be more important than your entry points most of the time.

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?

GO

Yes of course, otherwise strategies that were profitable during any specific type of market would continue to be profitable at all times. No single strategy works in all market conditions. We can only try to best adapt to the existing situation and anticipate the scenario that will unfold. Again, adaptation is the key. Of course, strategies that are profitable during a specific type of market may become profitable again if those same conditions present themselves again in the future.

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?

GO

We are 100% discretionary in our decision making process, so we are less exposed to the risk of curve fitting than, say, a systematic manager.

FXTM

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

GO

I personally like to look at more medium/longer term trades as that suits my personality much more than being an intra-day trader. As for SHARPE+SIGNA as a whole, our average trade lasts about 2 days.

FXTM

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

GO

I think that, more than anything, they should look at themselves in the mirror and identify their true strengths and weaknesses. That is essentially what I did. I realized that I could not be a trader that operates on an intra-day basis because of my personality and style. The temptation to trade is always there, and I will make suggestions on a daily basis to our team. However, I remain truthful to my medium/long term characteristics. This works well for us because the mix of personal styles that distinguishes our team leads to a balanced blend.

FXTM

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

GO

We actually don’t use leverage and de-lever when taking on individual positions as the average ticket size for us is $2mio per $10mio in AUM. In our view, we are de-leveraged on an individual position basis. The maximum aggregate leverage allowable to us is 1.5x, or essentially maximum of $15mio in aggregate positions per $10mio in AUM. On average, we are running anywhere between $5-$8mio per $10mio in AUM. Positions cannot be more than 50% biased towards any particular side, i.e. short/long USD or EUR or any other currency. We are very conservative and we try to be as precise as possible when it comes to choosing our trades.

FXTM

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

GO

We currently have a couple of execution brokers but we are considering reducing them to just one. This will simplify the trading process and thus reduce ‘operational risk’. We operate on a managed accounts basis only, and concentrating on one single executing broker produces a more linear process when making sure that all accounts have been properly traded and all stops are in place.

FXTM

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

GO

Given that Ultra HFT strategies are a completely different universe from what we’re doing here at SHARPE+SIGNA, mine is the opinion of an observer. I personally see more risks than opportunities; some of the risk clearly lies with the actual banks and liquidity providers rather than the managers themselves. These trades are put on and taken off quicker than you and I can blink! So given the speed, the LP’s may be stuck in a situation where lack of liquidity becomes an issue. Think about a major event, for example.

Also, HFTs trade according to certain data-based rules. In recent times it has become particularly evident that anyone can make a comment and move markets, which in a way may “corrupt” the very data signals are extracted from. In this environment, HFT strategies find it more complicated to produce “alpha”. The market is always changing and evolving and HFT programs run the risk of being structurally late. By the time HFT managers have created a new algorithm, the market has changed again.

I also firmly believe that no matter how smart some of these guys are, when it comes to developing a system, market experience is what makes the difference. Experience will always prevail, so long as you know “how” to manage risk properly!

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?

GO

With our style of trading, I think even at $5bio in AUM we would be fine without much of a problem in terms of liquidity. For the time being, we have $2bio as a benchmark that we’d like to reach over the next few years. We should be able to comfortably manage up to $1 bill with the current team as it is now, without any further additions. Above that level, I would consider bringing in additional members to our team and slowly integrate them within the existing structure. We have a shortlist of 20-25 good candidates in mind.

FXTM

What is the biggest strength of your team?

GO

Our collective experience in the markets, both on the buy side as well as sell side of Institutional FX desks, and our ability to cohesively manage risk in a disciplined manner is an absolute strength.

FXTM

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

GO

With renewed optimism about US growth, the rest of world, and particularly the EU, have positive spillover effects. We have noticed a similar trend in the UK as well. Secondly, EU sovereign bond markets have recently stabilized. Speculation of a deflationary environment has created renewed market interest in sovereign bonds supporting the currency for the medium term. Peripheral current account surplus, along with other core European countries, has improved drastically since the recession. The risks of a EU default and sovereign crisis having diminished, so market participants have started unwinding bearish positions. We have seen some short covering of peripheral bonds. Interestingly, the Euro as a currency is highly liquid and it has been used as proxy to short peripheral bonds during periods of crisis.  Reduced risk of EU default has seen short covering of the Euro against the rest of the G10 block. The theme should continue going into 2014, and we see the pair trading at 1.3500+ for next 6-12 months. It is currently at 1.3595.

FXTM

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

GO

Remember what makes you a “fund manager”, stick to your strategy, and don’t lose sight of risk management.