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2007 TOC

Phil Simotas, President and Director of Investment Management, FX Concepts (New York)

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Personal Background
Fund Background
Technology and Algos
Big Picture

Description of Firm:

As our name suggests, our focus is on currency risk management, and more than 90 percent of what we trade is in programs that are focused on producing an absolute return. There are a variety of strategies that we offer, and one of the things we’re known for is our breadth, in terms of the variety of currencies and the variety of instruments that we trade. That is, we trade both developed and emerging currencies — and we trade a lot of emerging currencies — and we also feature a wide variety of options strategies as part of our overall investment process. The firm itself was founded in 1981. We’ve been managing money since 1987, when we won our first mandate, and we’ve grown to a size now where we’re approximately 60 people and we operate primarily out of our headquarters in New York.

Assets Under Management:

Approximately $13 billion.

Products Offered:

We have four major programs. The two that we promote the most readily right now are our Global Currency Program and what we call our Multistrategy Currency Program. Both trade currencies exclusively. The Global Currency is based on an investment process that we began in 2001 that features what we think is a unique approach to portfolio construction across a universe of 33 possible currencies. That program forms the core of a broader strategy, our Multistrategy Program, which, in addition to the Global Currency Program, also features modules that trade volatility and options and has a higher-frequency trading component as well.

Trading Style:

We have a model-driven investment process, and while we do have some qualitative management that we overlay on top of that systematic process, the focus is on research and development and trying to quantify as much as possible the decision-making within our investment process. We realize that no matter how good we are at this effort, there are going to be certain factors that you just can’t quantify. So we feel that it’s important to have a qualitative component to the investment process. But that would account for about 5 percent of our positioning and performance; the vast majority is driven by the model that we’ve created.

One thing that we’ve really focused on in terms of our research processes over the last several years is improving the quality of our portfolio construction. One of the mantras that we carry around here is that it’s one thing to create models that generate good trading signals; it’s a whole other matter to create models that generate good portfolios. And having the combination of the two is really critical to create a thriving investment management process.

Structure of Trading Operations:

We have seven portfolio managers or traders whose day-to-day jobs are the trading and execution. Over the past several years as we’ve been developing our electronic trading capabilities, there have been more and more resources devoted to the IT end of the execution process. Within our information technology area, we have a group of three or four people who have been focused exclusively on trading technology.

INTERNATIONAL TRADING

Does the firm trade internationally?

If it’s liquid, we’re trading it.

What are the challenges of trading globally?

The biggest challenge is capacity as it relates to some of the more exotic currencies. But that’s where the portfolio manager earns his keep.

TECHNOLOGY

Technology Environment

The back-office system is something that we bought off the shelf and then added some customization in order to fit our specific requirements. The next step was to build on top of that our own intranet structure in order to create a straight-through-processing environment at the company. We’re now at a point where the models create the transactions that get fed through our intranet to our portfolio managers so that they have a menu of trades that sit in front of them. At this point they have the option of executing the transactions the old-fashioned way — by picking up the phone, or sending them off to an electronic trading platform that we’ve created internally, which is the newest piece that we’ve added over the past two years.

Do you have an execution management system in addition to an order management system? That’s the newest project on the books right now. The portfolio managers have some rudimentary tools that they can use if they want to execute electronically. We’re in the process of developing a broader array of strategies with which we can bring bigger amounts to the market and have those executions spread out over time in the most sophisticated way possible. In a sense, that will become a separate modeling process within the firm.

Buy vs. Build Strategy

Our approach has always been, to the extent that it’s available, buy it off the shelf because it’s cheaper and quicker. And by doing that, the expense of making a mistake is mitigated as much as possible, as opposed to building everything internally.

Who ultimately is responsible for the firm's technology?

Our chief technology officer, Kelly Adams. He’s been working closely with John Taylor, our chief investment officer, and me in this area. As a group, we’ve given this effort a top priority within the firm.

Use of Crossing Networks and Dark Pools

We’ve investigated them, but I can’t say that we’re there yet.

ALGORITHMS & BROKERAGE SERVICES

Use of Algorithms

That’s the area in which we’re the most heavily embedded in R&D at the moment. We would develop that internally.

Prime and Executing Brokers

We use two FX prime brokers, AIG and Deutsche Bank, and we’ve had the same two for many years, having been one of the first firms to utilize prime brokers back in the mid-’90s. We’ve worked with both of them in terms of bringing on board all of the new FX technology that’s come around over the years. Together with them we’ve been very proactive in creating as streamlined a process between us and the prime brokers as possible. And through them, we have scads of dealers that provide liquidity to us.

How do you determine which brokers receive your order flow?

It’s a cost issue. Obviously, when it’s a voice deal, it’s up to the portfolio managers to use their experience and relationships to negotiate the best price that they can get, and we have a metric that we can measure them against to make sure they’re getting best execution. And when it’s done electronically, we have an aggregation platform that we use here that combines the best bids and offers, so that we will achieve best execution from the electronic avenue.

Interview Conducted by Randall Devere, Contributing Writer