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FX MANAGERS

Interview with Matthew Harper

Chief Investment Officer at Excalibur Funds Management

fx managers systematic strategies Mathew Harper

 

Excalibur was the first Forex only fund to be launched in Australia. The company is regulated under the Australian Securities and Investments Commission. Matthew Harper tells us how 50 years of experience helped them to create a forex strategy, which combines both discretionary and systematic inputs and maintains Risk management as a priority.

FX Manager

Chief Investment Officer at Excalibur Funds Management

Strategy

Excalibur Global Macro

Location

Sydney

Assets Under Management

USD 220m 

Type

Global Macro

Style

Discretionary

Instruments

FX

Traded Currencies

G10

FXTM

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

MH

I started in FX just after the float of the AUD back in 1984 so coming up to 30 years. When I started it was the new department of investment bank and looked exciting and fast.

I have worked for English, French, Japanese and US investment banks running dealing rooms of over 25 FX traders and left in early 2000 to set-up a FX fund with my current business partner James Wallace who was then working at Citibank.

FXTM

What do you particularly like about your job?

MH

In FX the market is open 24/5 and doesn’t close so there is always something happening in the world that moves the currency and it’s a challenge to try and stay on top of how and why currencies are moving.

FXTM

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

MH

The FX market is a diverse group of participants including governments, corporates, banks, speculators and travellers trading currencies for differing reasons and not always for profit.

That is a unique market !

FXTM

When and how was the company born?

MH

Excalibur Funds Management was born in 2006 with James Wallace and I seeding the fund, and the idea was to bring a discretionary FX fund to the market. Excalibur was the first FX only fund to be launched in Australia.

FXTM

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

MH

Excalibur Funds Management is located in Sydney, Australia where the investment function is based. We have 4 equal owners of the business two from the investment side and two from the business development side. We currently have 7 people in Sydney and we have a small business development office in New York that will expand over time.

FXTM

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

MH

Obviously the C.I.O and C.O.O functions primarily drive the business, however we understand the investment universe is demanding managers to become more compliant and we now have a full time head of compliance/legal counsel.

FXTM

Which authorities regulate the company?

MH

ASIC-Australian Securities and Investments Commission

We have a AFS Licence No 299633

We are registered with the CFTC and NFA in the US

FXTM

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

MH

We express our global macro view through FX and combine fundamental, technical and market

analysis on a short term basis and trade only on medium and high conviction themes.

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?

MH

We created the strategy to reflect what we perceived to be a need for FX only products that provided good returns while maintaining a strict risk profile Risk management was a priority.

We incorporated discretionary inputs, as we have over 50 years of combined experience trading the currency market as well as systematic inputs addressing risk management. We feel the combination is just right for the current investor appetite.

We haven’t had any major changes to the strategy.

FXTM

How do you manage risk in the company?

MH

We don’t run portfolios as such but rather 1 to 3  FX positions simultaneously. This allows us to keep a very strict risk management profile.

We can allocate up to 1% of AUM per position and our monthly risk limit is 2.5% of AUM, if triggered we return to cash for the rest of the month and cease trading.

In 7 years of trading this strategy the 2.5% monthly drawdown has never happened.

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?

MH

Some GBP trades we have done in the past have been difficult and we have definitely learnt to concentrate on our core competency which is the AUD, where we feel we have an edge. This accounts for between 50-75% of our trades.

FXTM

Do you use a blend of strategies or one only?

MH

Only one, discretionary global macro.

FXTM

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

MH

Over the last 7 years of trading the FX market we have seen a huge range in volatility. Our strategy embraces volatility as we are adept at adjusting our leverage levels accordingly.

For our strategy a slow grinding market such as the one we experienced in the AUD  in 2009 is difficult

FXTM

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

MH

Seeing the fundamentals turns very negative for the AUD in March 2013 and positioning for this. We maintain our sell bias on the AUD and are very confident the currency will move sub 80c vs. USD next year. It is currently at 91c.

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?

MH

We only trade G10 and focus on our core competency—the AUD and its cross.

Our philosophy is to specialize and we believe we have an edge trading the AUD. If you are a EM specialist and believe you have an edge in trading those currencies, you should capitalize on it.

FXTM

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

MH

We built Excalibur’s strategy with risk management as our No1 priority. When you want to manage other people’s money you have to be able to demonstrate you can adhere to your risk profile. We market our strategy as being a superior risk adjusted return and that’s because we have a 7 year track record of 10% compound return with a Sortino ratio of 3.85.

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?

MH

The market is changing all the time and your strategy needs to adapt to those changes. That doesn’t mean any fundamental change in your investment process but it does mean you may have to tweak some of those inputs. For example, we found moving our time horizon for our technical inputs after our flat year in 2009 to a shorter term paid dividends and contributed to our +10% return in 2010. We are still using the shorter term technical inputs.

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?

MH

No, we don’t use any form of optimization.

FXTM

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

MH

Our strategy is short term as our trade tenure averages 3-4 days. We only trade on medium and high conviction trades and disregard any trade idea that rates as a low conviction trade, therefore we usually have only 10-15 core trades per month.

FXTM

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

MH

Risk management, not necessarily time frame, is the real key. I would suggest to establish the risk parameters and profile you want to trade to, and then decide which is the most suitable time frame.

FXTM

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

MH

We typically use no leverage. We feel we can usually achieve our desired risk/return profile without the need for leverage.

FXTM

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

MH

We have 5 executing broker relationships. We only use person to person execution as we find the information flow we receive from talking to our brokers is invaluable.  Also, we would only want an executing broker, and not a machine, watching a stop loss order we place.

FXTM

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

MH

All our research is free from our executing local and investment banks. We do subscribe to one economic service out of the US.

We are in the process of engaging Paladyne to provide, among other things, a portfolio management system for us.

FXTM

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

MH

Personally I believe it is only a passing phenomenon and feel the market is getting more crowded each day. The crowded trade/market is the antithesis of what we are trying to achieve at Excalibur.

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?

MH

Liquidity is not an issue for us as we trade only G10 currencies-the most liquid and transparent market in the world.

We believe our strategy profile can be sustained at over 1B USD AUM.

FXTM

What is the biggest strength of your team?

MH

Experience.

Our investment team is probably the most experienced antipodean FX combination in the world.

FXTM

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

MH

We believe broad USD strength will be a major macro play into 2014 and see the EUR breaking the 2010 lows of 1.1880.

FXTM

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

MH

Establish you strategy and seed it yourself for 12 months to get a track record.

Set -up the right infrastructure for you capital raising goals.

In order to sustain a sound fund management business in the long term, maintaining your risk profile is essential.