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43 The Case For Currencies As An Asset Class with Mark Whitmore of Whitmore Capital Management – 1of2

"I thought early on that having a fund would be really satisfying and exciting on a variety of levels." - Mark Whitmore (Tweet)

Our next guest started his firm back in 2012, and we're talking to him at a special moment in the company's evolution as it starts to gain outside capital and make its mark in the industry. Listen in to gain insights into how a manager started his firm in the current environment, the inside view on currencies as an asset class, and much more.

Thank you for listening and please welcome our guest Mark Whitmore.

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In This Episode, You'll Learn:

  • How Mark was interested in finance from a very early age and learned from his adoptive parents.
  • About his time studying macroeconomics in college.
  • The story of his career and how it took a windy series of turns before heading into the financial market.

    "I was a prep school teacher and coached junior high school football for a number of years." - Mark Whitmore (Tweet)

  • His time studying currencies when he was in law school and his time as lawyer.
  • How he started getting into the financial markets by investing in stocks in the late 90s.
  • How he quit his job as a lawyer and planned to go into the financial services sector.
  • His ventures into the currency markets and why he considered them in the first place.
  • How he started by managing his own money.

    "My metathesis at the time was basically to short the dollar and that ended up being a very good thesis for a very long time." - Mark Whitmore (Tweet)

  • What he sees in currencies as an asset class and how he describes that to investors.
  • How the currency market has changed throughout the years.
  • How he decided to launch his business in 2012 and how he got organized to take outside capital.
  • How he built the organization and his business.

    "A lot of what I do is mostly being a prosthelytizer in that most people view currencies as a hedging device." - Mark Whitmore (Tweet)

  • What kind of organization he would like to grow into in the future.
  • Why culture in a small company is a very important issue.
  • How he looks at track record, being such a young company.

    "Right now being a small emerging manager is a really challenging environment." - Mark Whitmore (Tweet)

  • How he created the models he uses for his strategy.
  • The example of the Euro and what Mark predicts for the currency in 5 years.
  • His thoughts on the Swiss Franc and the historical context of its value.
  • The Singapore Dollar and how it is likened to the Swiss Franc.
  • How many currencies he trades.

    "I’m of the belief that if I had 200 currencies that I could invest in, I’d be thrilled with that." - Mark Whitmore (Tweet)

  • How he thinks about diversification.

Resources & Links Mentioned in this Episode:

This episode was sponsored by Swiss Financial Services:

Connect with Whitmore Capital Management:

Visit the Website: www.WhitmoreCapitalManagement.com

Call Whitmore Capital Management: +1 (206)-227-0644

E-Mail Whitmore Capital Management: contact@whitmorecapitalmanagement.com

Follow Mark Whitmore on Linkedin

"Traditional business plans generally need to be shredded." - Mark Whitmore (Tweet)

Full Transcript

The following is a full detailed transcript of this conversion. Click here to subscribe to our mailing list, and get full access to our library of downloadable eBook transcripts!

Niels

Welcome to Top Traders Unplugged, where my goal is to give you the clarity, confidence and courage you need to invest like, or invest with one of the top traders in the world. It is the stories that you never get to hear, set out as the most honest and transparent account that I can make of what goes on inside the minds of some of the best investors in the world delivered to you via a one-on-one conversations. 

Today you are listening to episode 43. If this is the first episode you've heard, you might want to go back and listen to all the earlier conversations. On today's show, I'm talking to Mark Whitmore, but instead of me doing the introduction why don't we let him do it.

Mark

I guess I tell people that I'm a portfolio problem solver and after people get a glassy look in their eye, I basically say that I invest in money, which is, in and of itself somewhat fascinating to a number of people because I literally take positions in foreign currencies and hold them for periods of time hoping to make money on those positions. 

Niels

Thanks for doing that, Mark, and by the way, if you want to read the full transcript of today's episode just visit the TOPTRADERSUNPLUGGED.COM website where you will find great details from today's conversation. Now let's get started with part one of my conversation. I hope you will enjoy it. 

Niels

Mark, thanks so much for being with us today, I really appreciate your time. 

Mark

Well thank you very much for having me. 

Niels

Pleasure, Mark, I'm excited about our conversation today because I expected it to be quite different to some of my recent episodes. First your background is quite fascinating. Your trading approach is very different to many of my guests so far. You're at a stage in your fund management career which is full of opportunities, yet faced with many challenges at the same time, which I think a large majority of fund managers can relate to. So this will not be a case of telling a story of a 40-year career, but rather a real-time account of what it's like to be building an alternative investment company from scratch. Before we get to your story, I wanted to ask you a different question, a question that I sometimes struggle with myself, and as I keep asking the question to my guests I realize I'm not the only one. It goes something like this: imagine that you are invited to a reception with people you don't know, and after a few minutes someone will come up to you and ask, "so Mark, tell me what you do?" How do you respond? How do you answer that question? 

Mark

That is challenging when I'm in such a relatively niche area of finance to begin with. What I've come to determine is I introduce myself generally as a portfolio problem solver. 

Niels

OK, fantastic. Let's stay with you for a little while longer. Tell me your story. How did you get into this business? Go back as far as you want because I know that it has been a tale of many bends and turns along the way. 

Mark

Yes, that is true. Well, I ended up having a pretty keen interest in the concept of savings in general. I remember from a fairly young age my parents adopted me when they were fairly late in life and both of them had grown up during the depression, so I actually had instilled in me from a pretty early age the importance of having a nest egg and the kind of joy one experiences when you see that grow over time. I recall, even as a third grader, our elementary school library had a single book on stock investing and I remember checking it out and bringing it home and being fascinated and talking to my uncle who had a brokerage account and thinking about holding a stock and seeing it grow, and the idea of collecting a dividend. I quickly understood that.  

So really from a very early age I was intrigued by the idea of finance in general, and certainly resonated with Albert Einstein's comment about the most powerful force in the universe is compound interest over time. That was my early, early intrigue with finance and investing. Then, in college I was a real macro-economic guy, especially on a global level. I tried to study as much international economics as I could. A lot of it was quite theoretical, quite frankly there wasn't a lot of practical finance kinds of issues that I dealt with for the most part, but I did come across a very seminal work, for me, which was A Random Walk Down Wall Street, in the classic Burton Malkiel book. I very much... at the time that completely resonated with me: this idea that there's this kind of efficient market and that information gets priced in very quickly. I had this sort of working understanding of the financial markets in college, which, again, was totally theoretical - had no practical basis for applying it or anything.  

From there, my career took a rather windy series of turns. I started out... I was actually a prep school teacher and coached junior high school football and a number of other things, for about three years. Then I went back, and I did a law degree, which I combined with a joint masters degree in international studies. At that time I revisited some of the theoretical things I'd been doing in international economics and finance, and specifically began to look at how some emerging markets developed quite amazingly in the post World War II period, where others, notably Latin America, seemed to really languish and I sort of tried to get under the hood and figure out what were the factors that led to that. In doing so I began looking at currencies and what really effected currencies over time in terms of macroeconomics, but again totally theoretical. After I did that joint degree, I was working as an attorney and... 

Niels

What year are we... sorry to interrupt here, what year are we now, roughly, Mark? 

Mark

Sure, so basically I had been doing my work at prep school between... in the early 1990s, and then spent about four years doing the two degrees, so it was 1996 that I came out and began practicing law, so we're talking a little over fifteen years ago. I quickly determined that practicing law was not for me. I had great respect for a number of my colleagues. There was a super esprit-de-core but ultimately, from a passion standpoint (and that's always been really important, and sort of an energy standpoint) I felt a little dissatisfied. So I quickly concluded that my strategy was going to be to essentially live as frugally as possible, and try to set aside enough of a nest egg, because I felt like I wanted to do something else.  

Right about the first two or three years practicing law, I began to have a surprising development occur, which is for the first time in my life, despite the fact I was in my mid 30s, I actually had money to invest, and so now all this theoretical information that I had acquired over years had a practical implication. It was interesting. It was a fascinating time, as you know, being in the late 90s and beginning to get into investing because I come from this intellectual tradition of the efficient markets approach. I was just looking to buy index bonds, and as the late 1990s continued to evolve I became increasingly suspect of this entire premise, because I talked to a number of my really, really smart legal colleagues - generally smart, who had with their finances decided to invest in a number of relatively unknown tech startups and some wire stocks and the like. I began asking these questions like, well, what is your expectation for their earnings prospects and all that. Nobody, of course, had any earnings. We're looking at eyeballs and all metrics are different, and I remember probably in a very early time period hearing that the foremost expensive words in the English language are "this time it's different", and indeed I heard that enough that I began to modify into... even though I didn't know what it was at the time, more of a behavioral economics approach, which is that, well, wait a second, maybe prices, especially in the Tech market aren't really rationally driven. Maybe there is this sense of the herd running in the same direction with enough force that they drive prices to irrational extremes, which, this is the key implication, creates a profit opportunity. In the same time period, roughly, was when the East Asian financial crisis had basically fully come to fruition, which at that time created incredible opportunities in Asia. I kind of decided to do an about face. My paradigm was kind of blown up, if you will, and that's when I first began seriously looking at a contrarian approach, at least at the extremes in terms of investing, and more or less I would consider to be a deep value approach as well. 

Niels

OK. You were still practicing law. When did you decide that, OK, I've got enough now saved up and maybe it's time to try some of these thesis that you had acquired? 

Mark

So I was about midway through... so I practiced for a total of six years, until 2002, and I was not surprisingly paying off some graduate law school debt for the first several years. By 2002 I had set aside about a year's salary, essentially, which I figured was not obviously something that I expected to be able to parlay into a lifelong investing career, but I thought it would give me a bit of a runway, at least, so that I would be able to begin to helpfully deploy some strategies. I guess my default plan was to try to find something in the financial services sector, in general, like financial advising or consulting, that I would be able to do, but as I left... like a lot of things in life, timing is a lot of success.  

So for me, looking to now apply my analysis in currencies to the real world, sort of the tipping point for me was that, up until about 2000, roughly, unless somebody went to a bank and bought like 10,000 Australian dollars and stuck them under their mattress, there wasn't a lot that a retail person could do in the currency space. You could do futures, and managed futures and everything. That was a space that I was kind of naive enough, as a retail investor, not to know very much about. Once the retail spot FOREX platforms came online for everyday people, then I began to revisit some of the strategies that I had been looking at, which, unleveraged were interesting, but not potentially really profitable. Which now, with leverage, looked a lot more interesting.  

At that time, 2001, 2002, was almost the very peak of the US dollar and that was something that as someone even who was remotely familiar with the valuation of other currencies - you travel to countries, the dollar would buy a whole lot. Fundamentally the dollar looked very, very, very problematic. Greenspan had just had interest rates to 1/2% at the time, there was pretty large structural current account imbalances and the like, so timing was important because essentially my meta-thesis at the time was basically to short the dollar, and that ended up being a very good thesis for a very long time. 

Niels

Now I'm curious - the transition into currencies sort of both mentally and now you've started to talk about what happened that led you to or allowed you to do it practically, but you were talking to your friends at the law firm. They were making tons of money in equities and in tech stocks in particular, how did you even start considering the currencies, because not that many would look at that as their first area of investment? 

Mark

True. To be fair, I kind of initially waded into that market. I had about, initially I think it was 90% of my portfolio was more or less a long/short combination - long emerging market equities especially in Asia, short tech stocks. Then because of this unique kind of academic background I had and the work that I had done, in the back of my mind I had always thought, if there was a way that I could actually... because I kind of was ballparking that my strategy, I thought, would be able to garner somewhere in the 5%, 8% annualized return on an unleveraged basis, but I was finding enough opportunities in equity markets, especially emerging markets, that that wasn't that interesting, and then it was this realization, oh wait a second, I can employ... and boy, talk about giving you plenty of rope to hang yourself with, I remember at the time you could set up these accounts and you could get a 200 to 1 leverage - 1/2% could double your money or you could quickly lose everything. The important thing that happened very early is developing a risk management approach. I think the last time I read statistics that approximately 90% of retail currency investors have their account go to zero. So for me it was an issue of choosing prudent leverage, where I could take advantage of the strategy that I had without suffering gambler's ruin. So that became, and I have to admit that's been the thing that has evolved the most over time essentially. For me, how I got into currencies was really sort of a fluke based on my academic background. 

Niels

Sure, and one other thing that I picked up on in your early story here is the fact that you very early on seemed to describe yourself as a contrarian. Where did that come from? 

Mark

I think there were two precipitating causes of being... well maybe three actually. Apparently my Mom said, almost from coming out of the womb I was arguing (laugh). I always tended to be... so I sort of felt like Oedipus trying to deny my fate when I initially had gotten into law because when I grew up I never wanted to practice law. That was the one thing I didn't want to do. I had a very bad impression of attorneys and here I find myself indeed involved in that very pursuit, which made my Mom thrilled, but for me, I eventually needed to get into something else. So that was kind of the first thing, just the natural... I've always been sort of a dialectical thinker and always want to take the other side of an argument, so I'm kind of naturally contrarian, but then the practical thing... why I thought it became relevant in finance was... and I should have kind of developed a little bit more in talking to my colleagues. It had a real impact on me, because what I realized was that this was... I have great respect for my colleagues, but for lack of a better word I considered to be "smart dumb money".  

These are really intelligent people, but their understanding of what makes markets and asset classes move over time, especially long periods of time was not particularly sophisticated or well thought out. It really was something where it seemed to me that rationally, if everybody is running to the same side of a particular trade, that probably means somebody on the other side, if they have a longer term time horizon and can kind of weather some volatility in the meantime and some potential losses, might stand to make a lot of money. So intuitively, that made sense to me.  

Then at the same time I was reading people like Mark Farber, who I thought was spot on and correct in terms of indentifying things with regards to the tech bubble, and Jim Grant was writing about this, and Bill Fleckenstein, out in Seattle was doing the same thing. So there were some thinkers who I wanted to learn from, so I was following them and their analysis. Their analysis was compelling. When I read the other side, the bullish case, it seemed like, well, you've got the Fed; Greenspan is doing everything that he can to kind of keep this alive. We're going to be able to essentially have this thing last for a long period of time. It seemed to be very much focused on, well, there isn't anything like a catalyst that they saw in the immediate time horizon to reverse things, but to me the structural issues were becoming so imbalanced, so out of whack, that it appeared to me a compelling case - there has to be an adjustment. The adjustment will likely come in a fairly violent way. 

Niels

Sounds a lot like today, doesn't it, when you say it like that? 

Mark

It is interesting. I am not somebody who typically follows these wave patterns, but I find it intriguing that March of 2000 you get the very peak of the tech bubble and then roughly, in fact seven years ago, really today, it was kind of late October early November, the very peak of the general bubble in terms of equities and especially the mortgage real estate market and here we are seven years later and yeah, it has a very similar feel. What is it that Mark Twain said, "while history doesn't repeat itself, it definitely rhymes." I think that's very true. 

Niels

Sure, sure, absolutely, tell me a little bit further then. You're now in the early 2000s, and you're starting to move into the currency trading, but initially, I'm assuming you're doing this for your own account? 

Mark

That's exactly right. That's precisely correct. I had allocated a fairly small amount of the portfolio to this strategy, but again, good timing has a lot to do with this. I guess preparation meets opportunity, right? I thought that the dollar was poised for a rather significant fall against a variety of currencies. Similarly, I looked... I was following precious metals to some degree, and to me I thought that well, the precious metal... the currency commodities if you will, or the commodity currencies: the New Zealand dollar, the Australian dollar, the Canadian dollar, all looked remarkably cheap from a fundamental level, and they've all had interest rates, especially New Zealand and Australia that were significant, so it was one of those situations where I got paid basically to wait for the dollar to crash, right. I had a very good carry trade, the winds were at my back, holding these positions, and so what I found was that the 10% of the portfolio quickly became the majority of my portfolio and so I was continuing to simply build a strategy to manage my own money with a target, ultimately, and I figured...  

I thought very early on, probably within the first year of doing this, that having a fund would be really satisfying and exciting on a variety of different levels, and I also wanted to make sure, though, knowing that kind of being an economic history at heart that to take any one short period of time and extrapolate that into the future is a very bad idea, especially where there hasn't been numerous market cycles. So I set in my mind a seven to ten year window where I would employ this strategy, build my portfolio, hopefully build a track record and then, assuming that that performed in a variety of different market cycles, then think about bringing it out to market so to speak. 

Niels

Sure, amazing, now, if you want to elaborate a little bit about that period before you decide to set up your firm. Did your trading, was it pretty much defined from the beginning, or did you evolved during that particular period of time in terms of how you were trading? I also want to go into, before we dive into the more topical areas, I also want you to maybe explain why you think actually that there is a strong case for currencies as an asset class, in particular because currencies have been, as an asset class if I use that phrase, a bit of a lack luster. It has certainly been difficult for many hedge funds managing money specifically in currencies, so maybe you can talk a little bit about that before we dive into where you are today, and we take it from there. 

Mark

Yeah, I think for me that is kind of the most interesting and exciting topic, so I'm happy that you keyed that up. I find a lot of what I do is essentially being a proselytizer in that most people, like you said, view currencies and they see it through the lens of one or two things: one is it's strictly a hedging device, it's an insurance policy - you'll go ahead and take the cost if you will of hedging out exposure to different foreign asset classes that you have that are domestically denominated in those countries, and in essence then you have a negative expected return. It's just the cost of the insurance. Then the second view of currencies is that it is this domain of essentially technical analysis, trend following, which as you intimate has performed extremely poorly. I think the last time I looked, Barkley's currency traders index was up 1.6% for the last nine years. So you're talking about really not even achieving the rate of inflation, essentially. So you're negative long-term real returns and currency markets in the aggregate.  

So for me, getting to the issue of how my trading has evolved over time, I think one of the things that I felt very good about early on is I had spent years of my academic life, essentially, really trying to hone in on a model and an understanding of the fundamentals behind currencies. So while I didn't pretend to have ability to "time" when these reversions to fair value were going to occur, I had a high degree of confidence, at least, that I kind of know what the end point's going to be. I don't know how long it's going to take to get there. I don't exactly know the path that I'm going to find myself kind of going to get to this end point, but the end point, at least, there is a degree of clarity.  

So pretty much when I first sat down in, I think it was July of 2002, and essentially sort of devised a calculus for determining fair value of currencies, that calculus has remained intact for the intervening 14 years that I've been doing this strategy. Now I will say that that's not a static strategy. It's kind of a weighted approach. There's maybe 10 or 12 different variables I tend to look at, and depending on market environments and the macroeconomic backdrop and sentiment and risk and things I will tweak the balancing, but the factors themselves have remained static for that time period. So that part hasn't modified, but the way in which it's deployed, and the way in which I have kind of tweaked those variables has evolved over time.  

Niels

So what do you see in currencies as an asset class that maybe some of the firms that have given up in the last... or maybe I should rephrase that and say that the investors haven't seen in the last decade or so, where do you see that from a big picture point of view? Nothing really to do with the way you trade, but just how do we paint that in an attractive way to investors? 

Mark

Yeah, that's a challenge, I'll say, because most investors, and I would even say relatively sophisticated institutional investors, have again this sort of static view of currencies being one of those two buckets I previous identified, so trying to articulate a vision that if you actually pay attention to fundamentals, and if you see how macro-economics evolved over time and how certain currencies appreciate, in at least leveraged terms, quite impressively, and dramatically and others fall, that there really are consistent opportunities that the market presents itself, and a lot of it has to do with the fact that in the short term, so many people will drive other assets to levels quite frankly that are unsustainable. One of the things that I find so interesting about currencies is that the biggest puzzle we'll try to solve in the world, I think, in that there's so many different elements that go into what's going to result in a kind of a currency valuation, that one is able to take a variety of different variables and domestic, not just economic developments, but what's happening in terms of asset classes in markets and that has a huge impact on pushing these currencies to different levels which are unsustainable. That's really the opportunity, right? 

So I tell the people all the time is that volatility for me is the ultimate two-edged sword because in the short term it creates havoc in my life, right - directions that I don't necessarily anticipate. In the medium to long term, that's what creates the opportunity and so when I talk to people about currencies as an asset class, they say that there are two compelling reasons. One of which has been proven, one of which is not yet appreciated and understood, but I do think there's good evidence behind it. The one that's proven is that, of course if you are trying to create an efficient portfolio frontier and devise a portfolio that's optimized, you want uncorrelated assets. Currencies indeed unquestionably provide that.  

If you look at what happened in the general financial crisis, you saw so many assets on the down side that had a correlation coefficient that quickly was approaching 1. So obtaining true diversification in traditional assets was really a challenge, but there's no question that currencies can and do do that quite effectively. The second is being able to actually say there's alpha to be gained here. On that front, there's been some really good academic work that's been done. One by a collection of four economists lead by Sarno that looked at currency valuations, macro-economic variables and risk premia. They determined that even on an unleveraged basis that you can employ naive currency strategies: things like interest rate differentials and purchase power parity, and obtain solid results that have really impressive sharp ratios, actually as well.  

Then the Chartered Financial Analyst Publishing Institute also have something on a new look on currencies and went back 25 years and determined, through backtesting and whatnot that there were consistent opportunities to be gained using fundamental approaches basically. I think that there's some great work that's being done that basically says, yes, currencies as an asset class do make sense. 

Niels

You mentioned... a couple of observations I wanted to ask you about, again before we go on to the next topic. One observation that I would say is that 25 years ago, when I started in this business, we had a lot more currencies than we have today in Europe in particular, also it seems to me, that at that time, individual countries economic environments were not as controlled as we see today, meaning that the cycles (if we call it that) for each country and their currency was more determined by individual factors, or unique factors to the country, not as much as some kind of coordinated approach that we see today with all these worldwide G7, 10, 20 whatever they call themselves. So I wonder, because on one hand you would think that the economies today are more in sync and therefore maybe that means that there is a bit more correlation between currencies, but at the same time, as we know, if things are in sync, it could also actually mean that the movements you end up seeing become enlarged because it all seems to happen at the same time. What kind of structural changes have you noticed in currencies going back maybe beyond from when you started trading them? I'm sure you studied them going back in time, have you noticed anything that has changed? 

Mark

Yeah, that's a super fascinating area to raise, and I think that you do have, in some ways, intentioned these two different developments, one of which you articulated quite nicely, which on one hand you have a coordination that you have not seen before, and especially in response to global financial crisis. So you don't just have a situation that's very expressed liked in the Euro Zone where they've collectivized their entire currency regime, but you also have Switzerland, Denmark, Sweden, that are essentially having de facto pegs to the Euro as well, so you have a situation where, as you say, there's a whole series of currencies that are going to move in lockstep with one another, which would on its face, presumably limit opportunities as things move in synchronicity with one another. Then the flip side of that is that you've had what I call an increasing era of monetary disorder. You have a situation where... one of the questions that I get is about currencies and the efficacy of investing in currencies: why would you want to invest in something which is a pure fiat based regime, right? If you're tied to something relevant and you're in Switzerland, and Switzerland in 2000 was the last country to actually be... even have its currency partially pegged by gold. So since 2000 we've literally seen a free-for-all in the currency regime, essentially. So my response to that, though is that that creates the, I think, greater opportunity, because the currencies are the ultimate example of relative attractiveness. It's a situation where you don't necessarily... there's this kind of anecdote in the United States about if a situation where two people are out in the forest hunting, and they see a bear, and they only have knives, and one of them starts to run and the other one is like, "the bear's going to totally catch you." and he's like, "I don't have to beat the bear, I just have to beat you." In currencies that's a very similar thing in that there might be currencies that look, from an absolute fundamental level, to be not very impressive, but when you compare it to an entire regime of currencies, there's actually fairly good opportunities. Those are the kind of two things that are sort of intention, where on one hand you have currencies in the short term that are increasingly synchronized and moving together, but like you say, once it becomes untenable to maintain a peg or a relationship, and obviously the era of currency intervention is becoming more and more dramatic. I remember when I initially got into investing in currencies; the Bank of Japan was trying to defend a peg of roughly 115 Yen to the Dollar. Well, that quickly became completely untenable at one point, then the Yen dramatically weakened and then it dramatically strengthened. It dramatically weakened through 2007, carry trade was in place, and then that whole thing literally unwound more than any other major currency I've seen such that the Yen went from kind of the 130s all the way into the low to mid 70s, so real dramatic motion that had occurred basically there. I do believe that despite this increasing synchronicity of movements, you're seeing greater opportunities of these sudden breaks if you will. 

Niels

Yeah, we'll come to it, I'm sure, a little bit later when we go into the strategy itself. One thing I also picked up, you used the word, when you said there are still opportunities when you look at it (I'm paraphrasing here) when you look at it from a fundamental point of view, and I think maybe... the word fundamental is interesting to me because we've seen so many of these systematic firms in currencies actually close shop. I wonder whether you think that actually you do need some kind of fundamental approach to currencies in order to achieve the returns that are attractive enough for investors, or is that just coincidental that you chose the more fundamental route? 

Mark

I would absolutely agree with that, and I'll be the first to admit that I'm quite biased in my analysis and I call myself skeptically agnostic when it comes to achieving consistent alpha using trend following approaches or kind of systematic approaches, essentially. I don't think it's impossible to make consistent money, but I guess John Vogel said something about "not only have I not met somebody who's consistently made money as a market timer but I don't know anyone who knows anybody who's done that." At least my experience in the currency space is that there have indeed been some very successful strategies that have worked for a period of time, but the ability to replicate that, I think has been a real challenge. So to me, if I look at an industry that has underperformed so dramatically for basically a decade, I question the validity at least of the major strategies being used. That's not to say that there aren't people within that area that can masterfully deploy them. So I don't mean to cast dispersions when there are people who are successful, but I think as a general rule it's tough. I think one of the reasons is because as we become so much more sophisticated and the technology related to algorithms and high frequency trading has generated so much interest and there's been so many resources poured into that, it's hard to gain a competitive advantage. Almost any arbitrage opportunity on that front, to me at least, seems to be rather quickly gobbled up if you will. So a fair question then to ask is, well, why would the fundamental strategy be any different, right? If there's some insight that you claim to have, why isn't this being replicated elsewhere? I actually kind of have a pretty basic answer to that which is that the downside of the fundamental strategy that I deploy is the fact that, for instance, I don't use stop losses. I carefully monitor from a risk management standpoint, our portfolio, and I will take discretionary steps if need be, but the idea of a stop loss is sort of an anathema towards my very fundamental approach which is theoretically if I thought the Singapore dollar is particularly attractive at 127, then it should be even more attractive weakened further than that, and so I have found that I have been very deliberate in employing a fundamentally dry strategy. Again, it's really related to the end point. As long as I can see the end point in sight. As long as I have... and I have about 22 different currencies I invest in, so as long as I can create a very diversified portfolio where I'm not heavily invested in one currency that just implodes, because there are value traps that raise themselves periodically in currencies. The Russian rubble is an interesting currency at this point. Is this the ultimate currency value trap, or is this an amazing opportunity? That's a really interesting and not particularly easy question to necessarily answer with any sense of definitiveness 

Niels

When you use the word fundamental, I certainly also hear the word timeframe and I wonder whether the part of the edge is not so much that it's fundamental per se, but it's the fact that you allow yourself a timeframe that most systems can't. 

Mark

Yes. 

Niels

I want to do a little bit of an experiment, given where you are on your journey. So fast forward from your beginnings of trading your own currency book. Obviously you were very successful at doing it. Otherwise, you wouldn't have launched your own business which I believe was in 2012, if I'm not mistaking. 

Mark

Correct, about the middle part of the year. 

Niels

So what I'd like to do is... here's my experiment: I want to try to, because you are running a boutique business essentially, it doesn't make a lot of sense to talk about how have you structured your organization you know per se, but I think what makes a lot of sense is if you can take us back to the time when you decided to transition from managing your own money to managing outside capital, and turning that into a business. How did you approach the pre-launch phase in terms of getting organized and ready to take outside capital? What was the thought process you had to go through there? 

Mark

Yeah, that's... I think that is a very interesting issue. For me, one of the reasons why I ended up going on the later side of even my 7 to 10 year window of kind of launching a hedge fund (it was almost a full decade before I was able to get the fund off the ground). I waited that long partly because I knew in advance the biggest challenge of managing money is that, while I might have an iron stomach and discipline to be able to execute on a strategy, investors are not necessarily that patient nor as forgiving in the short term, if you will. So I needed to have a... sort of the financial where-with-all that should I enter into a time period where I started the fund and did not have spectacular performance out of the gate, or worse still, even had substantial negative performance that I would be able to actually weather that financially and not be in a position where I just have to close up shop.  

So the first thing that I did, organizationally, and psychologically, I guess, was to do very careful sort of cost planning, cost accounting, and give myself a long enough runway that given this strategy that is something which is a 3 to 10 year window sort of strategy, that I would not be in a situation where I would have to be at the mercy of hoping for a good start to the fund. I think a lot of fund managers, quite frankly, that I talk to at least... maybe that might be a shortcoming, is that the perception that they will be able to get lightning in a bottle out of the gate, and as you know, right now, being a small emerging manager is a really challenging environment for two very explicit reasons. One is that so much of the big institutional money is being directed to the tiny very top of the pyramid element of hedge funds. Hence, there's a lot of us that are generally sort of passed over, or ignored. Secondly relates to as long as we've had a now five and half year plus period of strong tailwinds at the back of especially US equities, it's hard to, if you have a niche strategy, induce people to kind of consider something, even if you have a strong absolute return is when they have such an easy way to make what seems to be easy money without much effort in a very low cost kind of environment.  

So organizationally I think it's so important to be able to... and I guess tying into that, that this concept is as an entrepreneur, that to think about this not just as a strategy or focusing on the financial, economic issues that you might love, but you've got to pick up the practical elements of operating a business, things like cash flow and profit and loss statements, and things like that. If you don't have, not necessarily a mastery, but at least an understanding and or can outsource that effectively, I think that you can get into real trouble really quickly. Especially in an environment where, I'll be frank. I expected a challenging environment. It's been even more challenging than I anticipated in terms of being able to attract capital and the like. So organizationally that was kind of the chief thing that I did was make sure that I had a very good plan in place to maintain the business in the worst case scenario. 

Niels

Speaking on that, how much, just out of curiosity, I think a lot of people will really benefit from this part of the conversation listening to your path and journey, what did you decide upon was enough of a runway to launch, and what did you decide... in terms of the organization itself, how did you go about putting that plan together? Did you, in terms of what do I need, which employees do I need, what parts of the business do I need to cover, how do I structure these things, what was the... take me through that process. I think that's so important for people to understand and appreciate. 

Mark

Right, yeah, so from my perspective and I am very, very, very blessed because my wife is actually the intellectual horsepower of our household here. She has been the COO of the hedge fund, and she has a dual Doctorate in Business and Sociology, and when she wrote her dissertation it was selected as the best dissertation in her field, so she's unbelievably talented, so she had left her job in academia several years ago, so she was able to spearhead the operational side of things. I'll be the first to admit, and this is kind of my general philosophy of life, is I try to play to my strengths and outsource my weaknesses, and in reality I have infinite weaknesses and only a few strengths. So for me it's an issue of how can I leverage what it is I feel like I add the most value and that I get the most satisfaction from while being able to make sure that all these other things that need to be taken care of indeed happen.  

So from my perspective, making sure that from an operational standpoint that we were able to be really sound out of the gate, to be able to... the one nice thing is that in today's world at least, for emerging managers, there are better and better outsourcing options. Clearly looking for us getting very good attorney out of the gate was very important, making sure our fund administrator and that our accountants were on board and trying to strike the balance between... of course like getting the best in class would be great, but as an emerging manager that's not necessarily cost effective, so trying to find the best balance of great service, great quality, at a cost factor that makes some remote sense was very important. Getting the outside advice, the counseling, and making sure that operationally we were sound, and then after that, the very first hire was getting a top notch basically senior analyst/junior partner, so that hire, Evan Tuck is on board and he is somebody who has just been an absolutely phenomenal, because the danger of what I do is that I've been doing this for so long now that I need to constantly re-examine assumptions, hypothesis', thesis', and so I knew I needed... and my wife is the first to admit that she has zero interest in currencies as a strategy, so I needed somebody who was going to be able to challenge me to push me to make sure that I wasn't falling into mistaken beliefs or assumptions and so getting Evan on board has been great. So as we continue to expand... I think our next serious area is kind of a systematized risk management person that we can rely upon. So as we continue to grow, that becomes the next real focus, I think. 

Niels

Sure and two plus years into your hedge fund manager journey are you kind of following the plan that you originally thought, or has the plan actually changed? Even the first couple of years, you mentioned that certain things were more challenging than you thought, maybe there were even things that were easier than you thought, I don't know? 

Mark

Right, you're right. I mean, kind of a two-edged sword, I mean the returns were easier than we thought. We've out of the gate done better than what I had expected, but the capital raising was even more challenging, despite getting returns that I was pleasantly surprised by, and it has modified the game plan a bit, because I had sort of hoped to be further along in building up the infrastructure of the hedge fund than we are now, but, like you alluded to, you sort of have to be dynamic in terms of your implementation of your system. In fact I was just in Geneva, actually a few weeks ago, at an entrepreneur's conference and somebody was talking about business plans and they basically said, and I was very sympathetic to this, that traditional business plans generally need to be shredded because the process that at least American Business Schools tend to instill in people is this static sort of check every box, move along this path, or whatever. Often times it literally builds in like no variation, and nothing ever goes the way one expects. So to have a dynamic ability to sort of reassess things as they're occurring in real time, and be able to deploy resources where they strategically and tactically need to be deployed at any given moment is really the challenge. So we have been doing that along the way. 

Niels

Now, despite being a small team today, are you already thinking about what kind of organization you'd like to build five, ten years from now? 

Mark

Absolutely. I'm actually a believer that personally, that small teams are the best teams at least for what it is that I'm doing. If I was deploying a macro strategy across eight different asset classes in a variety of different countries, then I think I'd have to modify this particular view. Given the fact that we're kind of dealing with a very top-down approach, at the strategic level, I would like to have a team of between 4 and 6 people on the strategy level and operations team that is roughly that same size. So I'd like in the next five years to think that we can with a dozen, fifteen people  have a really tightly honed, well-oiled machine to execute basically on what it is that we do. 

Niels

Sure, you know I ask this question of the people who run big businesses because there's always a lot of talk about this, which is culture, but running a small business, does culture play a role even in the initial stages do you think?  

Mark

I actually think that's a completely underappreciated issue is that really to me, the more I think about the strategy element of building a business, branding what you are, who you are, and what you stand for, really are the core values that are going to drive where that business goes in the future, so for me, I'm obviously... my wife and I are very well aligned on that front. Hiring Evan, that was one of the key things, is that hey, is this somebody who has the same vision, the same passion for basically hopefully offering a product that gets entrepreneurs really excited, is that there's something to share, that we perceive that we have something that is of general utility and use and we're excited about that. So to get somebody who shares that passion and who has a sense of integrity, passion, commitment, diligence, patience... I think that to have those things as core values that drive everything about the business is so very important. So that's one of the things that I hope that we're constantly being introspective and saying, OK, given what our values are, how are we doing on that front? 

Niels

Absolutely. Let's jump to the next topic and let's talk about track record, not in the traditional sense. First of all, just remind me exactly when your program began? 

Mark

So June of 2012 is when we were able to launch.  

Niels

When you started with no official track record at least, how did you visualize this product, this strategy to the initial investors that you were looking for? 

Mark

So one of the things I had tried to do in that 10 years when I was just managing my own money, was to both be, to the degree that I could, sort of a thought leader/blogger, so I would post commentary and thoughts usually unrelated to currencies, mind you, because for me especially in the 2007 time period, I was very, very concerned that we were collectively running off a second cliff, just a few years after the dot-com crash. Again, I listened to my friends at cocktail parties and it wasn't dot com stocks they were investing in but it was second, third, and fourth homes, and they were flipping them, and they were doing all this stuff on leverage with zero down, interest only loans and crazy stuff like this, and obviously I wasn't the only one that thought this. There were a lot of people out there saying this is going to end very, very, very badly.  

So I was trying to do everything I could to both write and recommend and caution people at that time. So in doing I had sort of established enough of a reputation for being a macro thinker in the investment world, that coming out of the gate with this very niche oriented strategy we were able to attract a number of different investors, both directly socially, and also through connections as well. I've continued to build on that thought leadership strategy by posting articles that I've written on our web site and Mark Plovers has been kind enough to publish a couple of essays that I've written on the currency markets, and so through that we've been able to attract some people who actually I think are really impressive folks individually as people who are part of the fund, so that was kind of the main strategy. I had a philosophy, and this is again why I needed such a long runway, is that it's... in the United States there was a movie with Kevin Costner, Field of Dreams, which kind of the big tag line is "build it and they'll come". So my thought had been if I can build a fund that is based on sound analysis and hopefully very good long term annualized returns, even if I enter into a period where I'm underperformed to begin with, time will be on my side, and eventually the capital... my hope is that if you are able to produce such a product, and again, time is testing your strategy and your being able to demonstrate returns that are outperforming, that eventually you'll be able to attract the capital. So we had a core group of people that were ready to invest based on both personal relationships I've had, as well as the thought leadership I was trained to do as well. 

Niels

When people look at your track record today, how should they interpret that? Is the track record reflecting a strategy and approach which has been pretty consistent in terms of methodology from the beginning; or from everything that you've learned in terms of managing your own funds for a long while, or has that been even further evolvement in the way you do things in the first couple of years? 

Mark

Interpreting returns, I think, is a very critical thing for investors at every level, whether or not they're the most sophisticated institutional investors, or retail investors, and I think there are two components to that question. The first component is given the returns that exist, how much credence do you give them? Of course, one of the things that I absolutely believe is that past results are not indicative necessarily of future returns. It is interesting that the time period, which is again only about two and a half years of actual returns has seen three very distinct sorts of somewhat anomalous time periods that when blended together, I think actually does construct a holistic story in that out of the gate... and I think I mentioned as an individual investor I had the good timing of being able to invest in the US dollar -shorting the US dollar as it began a long period of cyclical decline. Shortly after starting the hedge fund individually one of the biggest shorts that I had had for over a year was the Japanese Yen, from 2011 going into 2012. As you are probably are aware, towards the end of 2012 the Japanese Yen just completely unwound.  

So that was an example of coming out of the gate, where you get a home-run that certainly doesn't occur in the currency markets on a yearly basis even, happy to get it of course. So then after that there was a period of just kind of generally stable consistent monthly returns, which is kind of the norm if you will, but then, in the last year or so we have seen a tremendous amount of turmoil in currency markets in particular. In particular the Russian situation and intervention initially in Crimea and then throughout Eastern Ukraine and everything that has kind of fallen out as a result of that, that definitely had a very negative impact on us coupled with the fact that as we kind of alluded to earlier in our conversation, I tend to think that in this market there's more risks than rewards from a macro asset class perspective. So as a result, I've been more defensive than would be typical through this year despite the fact that for most of the year, up until the second half, that proved to be a very unprofitable strategy. So in other words there are three very distinct time periods, but when you aggregate them together, you actually get something which I think would be fairly representative, if you will of what I hope the fund will be able to do basically. So that's how I would respond to that. 

Niels

Well, let's move on to the next topic and talk about the trading program. We've sort of circled around it. I'm sure people are sitting waiting for us to... or for you to tell us more about it, so before we dive deep into the program itself, I wanted to ask whether you designed it with a particular objective or philosophy, so to speak? Is there something like that that sort of drives the overall profile design of your strategy? 

Mark

Well, yes, to the extent that... so when you look at... when you're trying to predict asset class movements, I've had this view that it's about the only area that I can think of where a longer time period can increase ones certainty factor. What I mean by that is let's use sports: If the... trying to predict last year's world cup at the beginning of the world cup was challenging, but you knew who the favorite teams were. If you were to ask the same person 8 years from now who's going to be the favorite - the top three teams in the world cup, it would be very difficult to impossible to do that. You're going to have completely different personnel, different coaches - you just don't have any idea. But with assets, that's one of the few areas where the longer the time horizon, I think the clarity actually can increase. So the philosophy behind the calculus I set up was that you might ask me what I think is going to happen to the Euro in the next six months, and I can maybe with a 55% to 60% confidence band give you an answer. But if there's a disequilibrium in the Euro pricing vis a vis the currencies and you were to extend that to say 5 years, then I can increase that confidence band to maybe 80% or 85% even. So the program was designed basically to capitalize on what I think is the certainty factor that comes with fundamental analysis over time. That's why, in picking the particular variables to look at it is very much a strategy that I try to use with a three to ten year window essentially. 

Niels

I want to try an experiment here, Mark, and I know you are up for this and that is why don't we stay with the Euro? Before we go into how it all works and so on and so forth, why don't you take a practical example of the Euro and maybe guide us through for a few minutes where you think the Euro will be in say 5 years time? How does this certainty actually come out in your way of thinking? I think that could be fascinating if you're up for it? 

Mark

Sure, absolutely. So the Euro unlike the US dollar and the Yen among the three major currencies, doesn't typically get, or doesn't consistently get a safe haven kind of respite in a situation where global markets become royal. Now, a lot of that obviously has to do with the potential insolvency issue related to Mediterranean countries and the like. A lot of the expected movement in the Euro is going to be connected to the general macro-economic backdrop, so if one presumes that markets are auto reinforcing in the short term, and mean-reverting in the long term, which tends to be my general assumption, one might expect that so long as this particular bout of volatility in general asset markets doesn't unwind, that the Euro could potentially stabilize and actually appreciate over some kind of short term time period.  

However, if one believes, as I do, that there is a fairly high probability that you will either have one of two scenarios: a sharp break in asset markets that occurs at some point in the next six to eighteen months, and an unwinding of general risk on trades, one would expect that the Euro especially if there is further weakness out of Spain, Portugal, Italy, countries like that, could see some fairly significant losses. However, it's also possible that you might see a period of just stagnation, is kind of flat lining returns and asset markets, at which point my expectation is that the Euro would sort of also be kind of bouncing along and stagnating.  

The key is that if there's an intrinsic break that occurs: if one of those Mediterranean countries actually has a Greek-like event that occurs, that's when all of a sudden all bets are off and the floor could be rather low basically for the Euro. But I do suspect that, given the structural weaknesses of the Euro, given the very challenging headwinds, a low growth environment, countries that have generally very high debt levels and demographics, which are not particularly favorable as you're looking out 3 to 10 years, I think that there are going to be significant headwinds, so my expectation would be that the long term horizon is going to be not a particularly favorable one for the Euro, especially versus what I would consider to be maybe more dynamic emerging market currencies as well. 

Niels

Sure, fascinating, very interesting. Now why don't you try then and explain... now you've used some of the terminology I'm sure already, but let's try and sort of take the structured view - sort of a top-down view as to how you're philosophy is being expressed: the component, the macroeconomic, the calculus, the disparity essentially that you're looking for between the fair value and the market values and how you put all of that together in a process, I guess is the right word. 

Mark

Right, so essentially I'm not surprised. There's sort of this kind of black box element as far as what it is that goes to the complete overall calculus and how it's implemented. In general terms and using some specifics, there is... current accounts are a significant issue in terms of currencies over time. Now, if current accounts are modestly either in surplus or modestly in deficit situations, that generally doesn't have a long-term impact, but when you begin to see chronic current account imbalances in either direction, that's where one could expect to see significant kind of medium to long term movements in currencies. So that is definitely something that I consistently look at 

One of the things that actually makes currency investing rather intuitive to people is purchase power parity is a huge issue. I alluded to that a little bit, I think at the beginning when I talked about the dollar and if you were to be traveling and would go to Canada, or Australia, or New Zealand, your dollar would go a very, very, long ways. There's a whole kind of area of academic research that generally tends to show that over long periods of time purchase power parity does have a really meaningful impact on currency valuations over time, so that's one of the things that we definitely look at as well. One of the things that tends to be... that some people sort of naive purchase power parity standards, which can be problematic is that standards of living makes a huge difference as well, so people will think, oh, well, if I go to Vietnam and a good is 50% cheaper, well then the Vietnamese currency must therefore be 50% undervalued. Well, the labor inputs that go into that particular good are also significantly less as well, so there're some adjustments that need to be made there. Another big, big, big issue to look at is interest rate differentials. There's been a number of CTAs, for instance, that have used, for lack of a better word, sort of naive carry strategies, and somebody correctly identified, I'm sure you've heard this, that plainly carry trade is sort of like vacuuming up nickels in front of a steam roller and one of the things that I've noticed and was able to capitalize on as an individual investor was that back in 2007 the carry trade had taken on such huge magnitude and significance that you had currencies like the British pound that were yielding higher, but not significantly higher than a lot of what the other major currencies that were getting huge premium. Similarly, the Yen was just getting annihilated. So the thing about interest rate differentials is that, if looked at in a vacuum, they can absolutely annihilated a portfolio, so in crafting a system or structure or calculus to be able to do this kind of assessment, one of the things was to be able to weight these various variables and to have a macroeconomic overlay that would dynamically adjust for the expected environment.  

So there's a big discretionary element. So on one hand it is highly systematized: I can run this calculus, and I can get a very (at least on paper) precise value for any of the currencies that we follow. Having said that, it's an artificial precision, because part of it is that in a dynamic world, even the data that I'm using is evolving and changing. It might be as recent as I can find, but there's obviously even more recent data out there. So for me, getting a sense of where the banding is in general for various currencies, being able to see where the huge variations are: either in overvaluation, or undervaluation; and then being able to use a macroeconomic overlay which says, OK, well there are certain risk-on currencies that are going to be, no matter how fundamentally good they are, in a particular macroeconomic environment like 2008, 2009, they're going to get destroyed. So that's where there's this very complex interplay, if you will, of very specific precise calculus like determinations coupled with this very discretionary based macroeconomic overlay. 

Niels

So let me try one of these things that you just mentioned there. Let me try one of my naive but practical examples, and we'll see how your model of response would be. As you mentioned, I live in Switzerland, and I recently went to the US and I had to buy a pair of sneakers for my 10 year old daughter, and here in Switzerland those Sneakers are about 85 francs. I bought exactly the same pair, two weeks ago in the US for $29, so does that mean the Swiss franc is going to drop 50% towards the dollar in the coming years?  

Mark

You have identified the thing that I modified more than anything else in terms of my structural approach to currencies several years ago, which was, I deemed it to be at the time, and this was roughly 2005 or so, the Swiss franc conundrum. As you are probably well aware, the Swiss franc, for the most part has, on a purchase power parity basis, remained somewhere between ridiculously and egregiously overvalued for years and years, and just having been in Geneva, I was blown away. I stopped in at a modest looking Greek restaurant for a quick midnight snack and ordered basically, a kabob with some hummus and a coke and it was $39 US dollars, and I literally... my mind almost exploded actually at that point. I had a comparable situation as a brief aside, I will definitely get back to the Swiss franc, but because this is relevant as well, is one of my other trips to an entrepreneurial conference went through Sidney and I remember very distinctly, and this was back when the Australian dollar was $1.08 US to get one Australian dollar, and I remember ordering a Hoegaarden beer, a pint - a draft pint in a pub and it was $18.50 US, and I was already short the Australian dollar, but at that point I added to my shorts. Literally, I got home, it's like wait, this can't sustain itself. Now the reason why Switzerland... and I would love to talk a little bit about Singapore too, because I think that's a really interesting country and there's some parallels distinctly. The reason why Switzerland gets this premium, essentially, is two things: one is the unbelievable level of... and if you look at current account surpluses, Switzerland and Singapore consistently are basically at the top of the world. Getting the amount of foreign deposits, essentially, into the Swiss economy does so much to basically blow up, in a very good way, overall standards of living - aggregate standards of living. Now, obviously there's issues in terms of how that gets distributed, but that then creates essentially a massive premium on anything that is going to be produced in Switzerland.  

The second thing is that, as a result of that, and as a result of literally the centuries of Swiss banking acumen, there is a premium that I think the global currency community, investing community, places on the Swiss franc. I think one of the fascinating things is going to be to see how this ceiling connected to the Euro is going to hold over longer periods of time. You asked me where I thought the Euro was going to be going in say 3, 5, 10 years, well, this 120 kind of connection with the Swiss franc and the Euro, in the short term, is quite a managed one. The Swiss bank obviously has reserves like to almost no end. But I'm a believer that longer term there hasn't been an example of any economy, any country being deep enough pockets where they have been able to infinitely maintain a peg that is untenable outside of Hong Kong, basically. That's maybe the one exception, which is a city-state, I think you can say it's different from a number of other levels. So to answer your question, I actually expect that in a period of severe economic weakness in particular, it might be very difficult for the Swiss bank to be able to maintain that peg to the Euro because you would expect those currencies to go in the opposite direction. People would want to flood into Swiss francs for safe haven purposes, and Euros might look extremely unattractive basically. 

Niels

Very interesting. You mentioned Singapore dollar, if you want to bring something up, here, feel free. 

Mark

So, yeah, Singapore I think is a fascinating country... city state/country from a currency perspective. They're the only country that I know of at least that actually attempts to manage inflation through their exchange rate. The thing about Singapore is that it is especially in an era where Switzerland has sort of succumbed to international pressure, if you will with regards to the secrecy of its banking system and the like, and Singapore has yet to do that, and as a result I think you've seen even more assets flood into Singaporean banks and Singapore has definitely been a regional financial powerhouse for some period of time. My in-laws live in Jakarta for about 1/4 of the year or so and there are these stories of ethnic Chinese getting on planes with suitcases for the short trip to Singapore basically suitcases of money to basically deposit in Singaporean banks because if you're living in a country like Indonesia, how comfortable are you with huge portions of assets remaining tied to domestic assets there.  

So Singapore I think is going to, like Switzerland, and their current account surpluses are even more impressive than Switzerland, continue to attract a great degree of money from all around the region and the world. As a result, I expect that the Singapore dollar will be one of the more attractive currencies to hold in the next ten years. Again, one of the things is that when you have a currency that's managed, you definitely have a headwind as an investor. Now Singapore has allowed the currency to gradually appreciate over time. I think it's important to note that if we ever do enter into a period of normalized macro-economic times where you have positive interest rates and the like, I would expect that Singapore will have enough potential inflationary pressures that indeed they will want to allow their currency to strengthen over time as well. So I think that creates, or will present a fairly interesting and attractive investment opportunity going forward. 

Niels

Sure, interesting, very interesting. So, you have your proprietary fundamental analysis. You mentioned the things that you look at, but then you, as far as I understand, you also have some kind of analytical overlay where you look at commitment reports, sentiment, and even something that you call cocktail chatter. So I don't know if that means that you go to a lot of cocktail parties, but I'm intrigued so please do enlighten me here. 

Mark

(laugh) Sure and I sort of stopped short in our previous conversation because I sort of mentioned we have this calculus and we have this macroeconomic overlay. Well, we really kind of look at it like a funnel, because the biggest and most important overlay is definitely the macroeconomic overlay. That has affected my investment policy individually, especially navigating something like the lead up to and then the general financial crisis, and then the aftermath, as well as for the hedge fund in the last 2 1/2 years, but sort of the second overlay, kind of down in the funnel is a sentiment based overlay, and I think we had talked a bit in the very beginning of the conversation about how I tend to label myself as a contrarian at least at the extremes. I tend to have this general philosophy that if everybody is on the same side of the trade then it seems like you will have great opportunity if, at least in the long term, if you are on the other side of it. Assuming you're not involved in a value trap. I'd be the last person in the world to invest in a company, no matter how good it looked if they were producing like eight track cassettes or something like that. Assuming in the currency world you don't have Zimbabwe or an Argentina, or something like that where they're essentially debasing and ruining the currency quite intentionally, you generally at the extremes have opportunities that generally present themselves.  

So for me in the past, what I've done in terms of again, talking to what I consider to be smart/dumb money, at cocktail parties and what not, is that if I sense that there is a particular investment thesis that everybody has grabbed onto, then I will almost without exception be on the other side of that trade, basically. We also do look at commitment of trader reports, because it's interesting to see how they disaggregate themselves in terms of the commercial positions, but then you have both the hedge fund positions, you have small investor positions, and mutual fund positions as well, and those types of investors all tend to, at different levels of magnitude or extremes act in very predictable ways, we find at least. That's where we've used that as well to modify positions that we would have. It might be that our calculus is saying that the Singapore dollar is particularly attractive, but then if there's something that happens, maybe regional insecurity occurs in that particular area or there's a particularly bad economic report there that temporarily takes down the markets, I generally have taken an approach that those kinds of data indicators tend to be "noise". Sure, they'll have a short term effect, but unless it's indicative of a longer term secular trend, it tends to be rather inconsequential, but it might present opportunity if there is a movement down and sentiment goes against a particular currency for instance. That's kind of the second analytical overlay.  

The final analytical overlay is the risk overlay, which we use. One thing that I've found personally, before I opened the hedge fund, and again another reason don't wait a long time before opening a hedge fund is you want to learn all the mistakes you can on your own dime as opposed to other people's dimes. In the past when I mechanically followed, my formula, what I realized is that there would be certain instances where I would have a whole series of currencies that all aligned on the same risk-on/risk-off kind of spectrum. As a result, I was exposing myself to a portfolio that was prone to systemic shock volatility, basically. So now we employ a risk overlay where we make sure that, OK, we don't have most of.. or a disproportionately large portion of our portfolio that is all on a risk-on environment, especially given our macroeconomic overlay, we think there might be a risk of a dislocation or something.  

Niels

Is it fair to say that the first part that you were talking about is more sort of scientific. You put numbers into a piece of software, so to speak, and it spits out some fair values for these currencies that you look at. Then comes these overlays, which is really information to you that you can then apply in a discretionary way, is that kind of how it works?  

Mark

That's precisely right. That's exactly right. 

Niels

How many currencies do you trade? 

Mark

A little over 20. 

Niels

What's the least liquid currency you trade today? 

Mark

Well, so one of the nice things, is being on the spot market, so we're organized as a CPO and I had a choice of doing this like a CTA with managed futures, and some of the futures are not particularly liquid and they're especially not liquid if you try to get any kind of duration, essentially, in the futures market. On the spot market, I guess it might be the South African rand, but even in that situation there's never been a time where there hasn't been an opportunity to get in or get out. 

Niels

OK, do you expect that number of currencies to change over time, or is this really a... I guess it goes also...  

Ending

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