Moises Michan, managing partner at Tanridge Capital, talks about the benefits of FX within a portfolio and explains how firms can benefit from more active hedging strategies
Profit & Loss: How long has Tanridge Capital been trading now?
Moises Michan: We started the firm about two years ago. We’re an FX-focused asset manager with three main products: alpha strategies, passive overlay and active overlay.
P&L: Prior to this you were on the bank side, correct?
MM: Yes, it was working on the bank side that I noticed a real gap in the FX market. I felt that there weren’t enough FX management services being offered to small and medium sized institutions.
FX is the largest market in the world and as a result everyone is affected by it, whether you’re a consumer on the street or a large pension fund manager looking to allocate to alternative strategies and asset classes. But often the large banks are all fighting over the same large hedge funds and big institutional players, whereas there are far more smaller clients that could benefit from FX management services.
What I saw was that for smaller client types there wasn’t as much service, for example you could see a family office in Peru managing in the region of $250 million for a family there with a mining business and, while they know how to trade FX, they don’t know how to use it to diversify and break down the correlations that they have in their portfolio.
P&L: So what’s the biggest challenge with these small and medium sized firms?
MM: So although this a big and under-served market, the caveat is that there’s a lot of education still to be done in this space. We have to start with conversations at the beginning explaining the benefits of having active FX strategies in your portfolio.
The other thing that we’re finding is that there are a lot of people who have been burnt by the FX market in the past. If a medium sized fund manager trading international credit or equities doesn’t correctly hedge their FX exposures from USD or EUR feeder accounts this can take 10-20% off what they would be making from their underlying strategy.
Or you see corporates or medium sized regional banks forgetting to hedge out shares that they own in foreign countries, which again can have significant implications on their portfolios.
That’s why we’re talking to these firms now about passive overlay – which is just hedging – and finding that some of these firms prefer to outsource this function rather than hiring a trader or giving trades up to a bank where the charges for that service are not as transparent.
Most people look at hedging as a cost, a transaction that they have to do in order to protect or acquire an underlying asset. But now we’re pushing into active currency overlay.
P&L: What is an active overlay?
MM: An active currency overlay is when instead of hedging being a cost, we’re able to lock in the same exchange rate and at the same time make a yield enhancement on that FX exposure.
For example, one UK-based credit fund manager we talked to had just opened up a US dollar feeder account in the region of $100 million. Being UK-based he was transacting in pounds and knew that he needed to hedge because in two years time those investors that came in through the USD feeder account would have the choice of being able to withdraw from his fund and so he was looking to lock in a forward contract.
This person was going to sell a one-year forward at 1.42, lock in that price and sell cable and buy dollars and then roll it over for the next year.
But what if I could target a 4-5% return while locking in the same exchange rate?
The way that you can do this is via options, for example selling covered calls against it. In the case of the credit fund manager we would have been to sell a cable call at 1.42 that year that would have yielded 5% on the options curve.
There’s people leaving money on the table with regards to FX exposures and the active overlay aims to try and reap those rewards by actively managing those exposures.
P&L: How have market conditions impact demand for these products?
MM: Well the low interest rate environment has pushed a lot of global capital to seek yield elsewhere, which has been a saving grace for alternative liquid FX strategies such as ours.
Brexit was actually a good example of something that drives demand for these products. After that we had a lot of people calling us up either because they weren’t properly hedged and got burnt or because they wanted to find out how they could benefit from a move like that.
At Tanridge Capital we’re generally long volatility players. Our main alpha program is a long volatility options strategy, which looks for distortions and asymmetric opportunities in the market. This means that you can get a series of small negative months but then when there’s a big spike like that it can makes the entire year. We also have a systematic strategy that tends to outperform in an environment of rising vol.
P&L: So how do you view a potential US rates hike then? Because on the one hand, you’ve said that low interest rates is driving business as firms look for alternative yields, but on the other hand interest rate differentials could see more trading opportunities the FX market…..
MM: When you start getting the carry trade because of bigger interest rate differentials it tends to lower volatility. An important thing in the asset management space is being able to review change in the portfolio and deciding when to switch from a long volatility strategy to a carry trade.
We’re actually implementing a new strategy right now, a systematic one based on sentiment and flow. What this strategy does is it starts to indicate when we might want to consider scaling down our long volatility strategy and switching our regime into a carry trade.
But in general rising volatility is very positive for us, that’s when we make our biggest returns.
P&L: What currencies do you trade?
MM: So on the macro discretionary side we tend to focus on the more liquid currencies in the G18, we don’t trade RUB or BRL for example. You have to be careful because with the less liquid currencies you can have the right trade but not have enough liquidity to cash in. That’s the scary thing, you could nail it in terms of direction, but if you don’t have the liquidity……
On the systematic side we pretty much only deal in G7 currencies, it’s a bit more concise.
P&L: With so much more information and data available to so many more market participants now, is it becoming harder to find unique trade ideas?
MM: So I like making pizzas, I’ve been doing it for years and have my own pizza oven at home. I’ve not had one pizza pie that I’ve made come out exactly the same as the others, and I think it’s the same with trade strategies.
It’s actually very hard to come up with the same product as someone else. It might be the same direction, the same idea or the same thesis underpinning it, but there’s always going to be some difference and even the slightest difference can have an impact in terms of losses and returns.
The bigger hurdle is really making people understand why they should be trading FX, why they should be hedging or why they should be using an active FX strategy.
The competition isn’t really within the FX space, it’s explaining to people why they should invest in FX and not some EM bond portfolio or international equities.