There is not much that the trio have not seen or done. But speaking with Rony Schläpfer, the company’s chairman; Phil Gellos, its president; and Steve Jury, its chief investment officer, it soon becomes clear that they have far more to offer than a history lesson.
Schläpfer is a true market legend. Older FX hands might remember him from his appearance in an early television documentary about the industry – Billion Dollar Day – shown in the mid-1980s. The film focused on three traders working out of Hong Kong, London and New York. Schläpfer stood out because of the size of the positions he was running and because he was not working for a bank. Instead, he was effectively trading his own account, backed by a few wealthy investors.
His company, Capital Management International, was one of the first funds specializing in currencies. "In the early 1980s, I believe we were one of the only firms trading privately in FX on a speculative basis outside of the banks. I don’t know anyone who was trading currencies like us," Schläpfer says.
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Rony Schlapfer and Steve Jury, Tradex Capital Markets: waiting for a surge in investors |
FX myth says that his first backers were a group of doctors and dentists. "It’s true; we had a lot of doctors and dentists involved. For some reason they liked the currency market," he confirms. But more important, he had the backing of a wealthy European family who were fully prepared to support his aggressive trading. Starting off with $10 million, Schläpfer was soon running positions of half a billion dollars, which led to good returns. It also led to some hefty profit and loss swings.
With the benefit of hindsight, Schläpfer is incredulous at the backwardness of risk management at that time. "We never got a phone call from any of our banks questioning what we were doing. We used to do business over the phone, get a telex confo at the end of the day. Even back there, we were trading with a 5% margin."
Another big difference between then and now is that few banks were prepared to let clients trade on margin. "The banks now are more willing to get involved and offer margins as low as 3%. Typical prime brokerage agreements require you to give up trades within two hours. Back in the 1980s, it was all done on an end-of-day basis, at best," says Schläpfer.
Another change is that it is easier to access the market’s various liquidity sources, including the electronic brokers at its hub. "The information flow has improved. When we started, we had a listening service from the brokers but were unable to trade through them. Now you can access liquidity directly," Schläpfer points out.
This, he believes, has led to a market where the majority of proprietary risk taking is being done by funds. "The banks have largely pulled out of that business," he claims.
Gellos, who carved out a fearsome reputation initially as a flow and then prop trader, agrees with this sentiment. "Before the emergence of hedge funds, the majority of the risk-taking was done by the banks. The banks’ risk is now much more short term and stems from their role as liquidity providers," he says, adding: "The majority of the longer-term risk taking has now moved to the hedge funds."
While access to liquidity has been a key factor in the emergence of FX funds, Gellos says that the development of technology allowing real-time risk management is just as important. Tradex Capital Management now has about $2 billion under management in its currency programmes and invests in as many as 30 different sub-managers. Not surprisingly, it wants the ability to monitor what they are doing.
"FX is a unique asset class because for the most part it’s traded on a managed account basis allowing the investor complete transparency. You really don’t need cash to trade, just the prime broker’s credit. This makes currencies a unique asset class and an exceptional product for the fund of funds universe. With relatively small amounts of cash we can fund a managed account, but to get the best returns, you need the ability to choose managers dynamically and monitor your risk in real time," says Gellos.
And there is no doubt that Tradex does this; it is well known that it once alerted the prime broker of one of its sub-managers that something was amiss with the fund, which turned out to be a rogue trader on the loose. Not surprisingly, it has little to say about the incident, other than to point out that Tradex’s risk controls proved extremely robust. "We’ve built a totally unique risk-management system that provides us real-time access and complete transparency to all of our managers. Our real-time P&L and exposure monitoring provides our investors with a high level of comfort. We can and do watch our 30 sub-managers in real time," Gellos adds.
Perhaps surprisingly, the trio feel that, despite all of the talk about FX being accepted as an asset class, relatively little interest has been shown in it. However, that is starting to change. "For the past few years, the low volatility environment didn’t help attract new investors. But as it has picked up, we’ve really started to see a lot more interest and I think we’re now at the stage where the industry is going to see a real surge in investors," says Jury.
In expectation of this demand, the company launched a new programme, Tradex Alpha, at the start of 2008. This offers investors a more concentrated portfolio consisting of seven sub-managers, providing a higher degree of volatility than the company’s original fund. It also offers a choice of one or five times leverage. So far, it has attracted $350 million of investment and Jury points out that it is the more highly leveraged fund that is witnessing the greater demand.