The lone wolf of currency overlay

André Perold

Perold is well known for his work on currency risk management. A year after visiting JPMIM, he co-authored a paper, The free lunch in currency hedging: implications for investment policy and performance standards, which, in the past decade has been included on almost all reference lists about currency overlay.

Lee, who had also been a lecturer in statistics at the University of Pennsylvania before JPMIM, quickly realized that this fellow academic was a man worth listening to.

The case study that Perold did on JPMIM's fixed-income business made Lee realize that managing fixed-income assets was like having two portfolios - one in bonds and another in currencies. "I suddenly figured there was no return for lots of risk," says Lee, as if it had been the most obvious thing all along. "That's when I realized that currencies were a separate animal to stocks and bonds."

From then on Lee became known within JPMIM as the "lone wolf of currency overlay". Aggressively, he pushed the firm into a complicated business he says it was reluctant to enter. But Lee could see that clients wanted it, and the result today is that JPMorgan Fleming, as JPMIM is now known, is one of the world's largest currency overlay managers. By the time he left in 1999, the firm had 25 clients and $30 billion in currencies under management.

Lee describes his achievement in setting up JPMorgan's overlay business as a special moment in his life. But the firm never shared his enthusiasm for overlay quite so keenly as he would have liked. So three years ago, he and four colleagues decided to go it alone in Dublin, having realized that all they needed to make an overlay business of their own were their trading models and a cafeteria. "It's a cool story," says Lee fondly. "You don't start money management firms very easily but I just think this [business] is so obvious." Today, Lee Overlay manages $1.5 billion-worth of currencies for seven clients using a mix of quantitative models in a fundamentals-based approach with some controlled subjective input.

JPMIM was wary of having a currency-based business in the early days of currency overlay, and one of the fondest memories of Lee's career tells of a time when he proved them wrong. For about 18 months in the early 1990s, his fundamentals-based trading models were losing money on dollar-yen trades. According to Lee, the yen was overvalued. According to the markets, it was not. But on August 15 1995 - Lee remembers well that it was the Feast of the Assumption, a public holiday in most of Catholic Europe - the markets had their comeuppance. Dollar-yen moved upwards four big figures and JPMIM made more money in 24 hours than it had lost on the trade for more than a year.

"Currency overlay is a specialist activity, and I've always wanted to do something special," says Lee, sounding more than satisfied.