I recently sat down with my colleague, Kristian Kerr of DailyFX, to interview him about his time as a former research analyst and portfolio manager at FX Concepts, previously one of the largest currency hedge funds in the world. The interview is available in audio only format or via the transcript below. So Kristian, could you just give us a little background on what FX Concepts is and did and your experience there. FX Concepts was one of the largest currency focused hedge funds in the world.
So they were kind of one of the few hedge funds out there that focused on the FX business. So, what did you do specifically there? You said you were there for about 7 years? So, what can you tell me about the strategies that FX Concepts used and how did their model work? And how did you fit into that? Yeah, it was primarily a systematic fund. It was basically just kind of a hybrid strategy to try to add alpha to the performance of the fund, which I think worked pretty well.
So you bring up a couple of interesting points. First, I want to ask you more about the models used by FX Concepts. Can you talk a little bit about the inputs used - price, volume, sentiment? What types of inputs were used in their models? They looked at anything. They had some pretty brilliant quants that came up with them. The initial model I believe was actually cyclical. So it was based on cycle elements that John Taylor came up with, but they evolved you know with the market and developed some pretty complex type strategies.
So it was a whole host of strategies. On the systematic side, it depended on what they wanted to achieve with the strategy, but it was varied in terms of the different systems that were running at any given time. So in your view, you said the discretionary overlay was there to add alpha. Can you talk about that a little bit and where do you think that comes from? What can a human do better than an algo system? All of those types of things, I think, are things where you can get a little bit of an extra edge if done right.
Where I think you get into problems is when you try to over-optimize and the human discretionary component becomes more and more. Can you expand a little bit about what we were discussing earlier? What models did they use and what are some of the challenges of a fund that size implementing an HFT type strategy?
I mean they were relatively late to the game on high frequency stuff. The big issue is after running a bunch of tests and running through a few different strategies, they ended up finding a decent high frequency trading strategy. FX Concepts, from what I read, was in business for 32 years and then they closed up shop not too long ago.
Can you talk about that a little bit? What do you think ultimately led to FX Concepts closing their doors? They were in an environment where central banking authorities and other policy makers decided to suppress volatility in the aftermath of the global financial crisis. You know vis a vis QE, vis a vis the suspension of mark to market. So we had suppression in vol[alitity]. Currency volatility fell to its lowest levels ever if you look at CVIX a couple of years ago.
So I think that is what really undid them. Just the fact that vol[atility] just collapsed and stayed that way for a while. Of course the interesting add on or PS to this story is that was almost - once all those funds started going out of business was almost the exact low of currency vol[atility]. You know, so it kind of goes to that idea of a Minksy moment.
Stability begets instability which is what we ended up seeing and now there is a void in the market for these type of big FX hedge fund players. Obviously what ended up happening 6 months later, you had the BOJ come in doubling down with Abenomics. We went from very, very extremely low levels in vol[atility] to extreme levels of volatility.
When things get that way you almost have to start to think contrarian because the market almost becomes too accepting of thinking that regime is going to last forever. So, we were talking earlier about some scalability issues with low vol[atility].
Yeah, not so much the vol[atility]. I would say on the retail trading side, the big difference between a big-sized trader that is going to run a system like [FX] Concepts. There was this gigantic shift in the terms of the way the FX market works and I think that really is a huge change or benefit or potential catalyst for the retail algo trader.
When I left, we maybe got 1 bottle of wine. Who wants that type of service? Is the guy running a system, does he need that? Probably not because his inputs are all technical, or primarily price based, you know, market focused. Not so much on flow of information.
Have a hybrid model. I know a lot of funds will still give a lot of business over voice because they want to have that liquidity access in case something happens on the electronic side.
In case you get an SNB type event, you still have relationships you can use if the electronic side goes down. You probably pull the plug for those few minutes. Speaking from my own experience, when I got my start trading and was trying to build an algorithmic trading strategy, I always felt like I was on the outside looking in and geez, if I just worked for one of these big players, I would know so much and it would make it so much easier to find profitable trading strategies.
The more money you manage, the better access you have to talent, things like that. Working with very, very smart people who can come up with solutions very easily to things, but you also give up a lot too.
It becomes much more of a process — investment committees, those kinds of things. On that size of a fund, you talked about the transition from voice to electronic, how advanced were the execution algorithms for something like that. It shifted with the market, right? When we first started, we were one of the first ones to use aggregation mainly because we had so many counterparty lines, so we were able to do that.
We were one of the first ones to actually take advantage of some of the aggregation software. So it went from being almost we were taking advantage of the banks because we had almost a deeper knowledge of liquidity than they did to where they got more sophisticated as they started to figure out the electronic side of the business as high frequency guys left equities and started to come to FX.
Nowadays, everyone is trying to read how much is there and the market shifts almost instantaneously. It went from being very, very simple to taking advantage of to have that turned around on us when the banks basically figured it out, so to speak.
A couple more questions from me. No, I think you hit on some really good topics here. Theoretically, those using algos should be able to take advantage of it. Tell us, where do you want people to find you, connect with you, contact you and what are you focusing on next?
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