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Opinion

FX debate (part two of two): Towards a golden age for foreign exchange

Last month the panel examined volatility and the reported demise of the dollar. This month, they discuss the merits of prime brokerage, the weakness of algos and how to generate alpha.

Currency markets in a post credit crisis world (Part one)


Delegate biographies: Learn more about the panelists


Have you seen results of the FX poll: Largest FX banks by volume?


Executive summary

• Demand from corporate clients includes both FX technology to facilitate cash management and products that enable effective hedging

• M&A-related FX transactions are expected to keep growing as M&A activity will remain buoyant in emerging markets

• Demand for prime brokerage is growing and a well-organized prime brokerage service gives a bank a competitive edge. Corporates are increasingly using prime brokerage-type services

• Price differentiation in prime brokerage is growing to take account of different degrees of risk and transparency among customers

• Algorithmic trading in the FX market is incapable of offering the same sort of advantages it has given in the equity markets.

• It will be possible to generate FX alpha for a while longer but much of the alpha is being ‘beta-fied’ into commoditized products using algos or indices

SB, Euromoney Clearly financial institutions and asset managers have been the focus for the last few years. But what about the corporate client?

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JS, Deutsche Bank At Deutsche Bank our corporates are taking us down two different paths of product development. One type of client wants us as a technological provider, to work with them on integrated cash management, which involves FX and the use of our technological backbone. The second type of client is asking us to take different types of risk than we’ve taken before, risk in which the FX is linked to sometimes extremely illiquid assets, such as corporate finance events, and they are also demanding more complex structuring of transactions, for example to create certain accounting events. So clients are asking for two distinct, highly specialized services from us.

SB, Euromoney How does that service relate to the cash management or prime brokerage businesses?

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JS, Deutsche Bank Prime brokerage is very similar to the business we want to do with corporates. What is the core competency that the client wants from us? Whether it involves credit, settlements or the fact that we’re in so many countries, the corporate client wants our backbone.

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EP, UBS Corporates continue to be innovative with respect to derivatives; they continue to be among the largest users of average rate options for example. Whereas hedge funds favour barrier-type trades to express a view, corporates typically use derivatives as a risk overlay. And remember, fundamentally options are insurance products – they become more interesting as volatility increases. We therefore expect continued volume growth.

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CK-G, Société Générale I think IAS 39 in January 2005 changed the landscape quite dramatically for corporates. Accounting impacts were transferred directly to equity valuations, and so the speculative side of the business almost collapsed overnight. Traditional sales coverage now focuses on yield-enhancement or on cash management, treasury and providing a total service as has been described. That means, for example, handling cross-border M&A transactions and generally following your client around the world. On the hedging side for translation risks, the current level of the euro against the dollar is very interesting. Corporates expect the euro to start giving ground here and the dollar to appreciate, just look at the volatility skew of buying a euro put, versus a euro call. I suspect right now if we were to see a break through the lows in the dollar, we would all be providing a lot of support for corporates to hedge that weaker dollar which they don’t expect.

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RB, Investec We know that volumes in FX markets have grown a lot over recent years. Has corporate volume grown at the same rate, at a lower rate or faster?


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JS, Deutsche Bank Our corporate line has definitely not kept up with the algos. One client once did 64,000 tickets in a day with me on the algo side. There aren’t a lot of corporates that can book that many tickets in a year. Another issue is that corporates are looking for a larger commitment from their partners. They’re not expanding their staff and they’re always trying to trim back. They’re looking for partners that will be there for them, not just as an FX provider. It’s a challenge to be that type of full broad participant with that type of client.

SB, Euromoney Are corporates looking for banks to help them navigate the new regulatory burdens?

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JS, Deutsche Bank Banks are required to fulfil their duty in terms of appropriateness of the product for the client. That responsibility’s been there for the last 15 years and should be there for ever. Our clients have digested IAS 39 and FAS 133 and they have adopted a VAR approach. So they will look at what is the benefit of the product we’re showing compared with the cost of the additional accounting VAR. Does the trade make sense? That is becoming the way the clients look at these trades.

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HB, JPMorgan Chico, you mentioned M&A flows and M&A transactions. My perception is that those are very episodic. You might get one or two and make a lot of money. Will we see more or less of that in 2008?


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CK-G, Société Générale The growth of revenues from M&A transactions has pretty much matched what I would call the pace of globalization. If you expect globalization to continue, as we do, so will the pace of M&A transactions. We will see mega-mergers in the developed world, and a plethora of opportunities in emerging markets. We are very focused on emerging Europe right now and will capitalize on our own acquisitions in Russia.

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VD, Bank of America We’re seeing the same things at Bank of America. Deal-contingent trades today, while not vanilla, are certainly much more common and books are running them. But delivering the bank is still very important – an accounting expert, a portfolio, an analytics person to look at the balance sheet – and they realize especially in this dollar environment that their dollar risk is non-linear. As the dollar changes, their business changes, so they can’t just look at what their exposure is today.

SB, Euromoney Is this consistent globally? Aren’t emerging market corporates more willing to take views for yield enhancement, as opposed to just hedging?

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EP, UBS In our experience emerging market corporates put a premium on education. They’re looking for more systematic guidance on how to manage a balance sheet and use FX products as risk management tools.


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CK-G, Société Générale Capital structure is an issue that dominates many discussions in emerging market corporates because of their expanding domestic and international opportunities.


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DB, HSBC It’s true that the legislation and the outlook are different in different places, and that therefore views are different. But the bottom line is that as a bank we can never ever encourage a corporate to take foreign exchange risk. The whole idea is for them to concentrate on their underlying business, not for them to be foreign exchange players. If they’re looking for yield enhancement and they’ve got a reason for it and target rates that fall into it, that’s fine. But they’ve got to understand it fully, otherwise you should mitigate the foreign exchange risk, not enhance it.

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CK-G, Société Générale I agree, but anecdotally, when you ask corporates about their time horizons and when they want to hedge their risks, more often than not they say: "When it’s favourable". And that’s akin to taking a view – it’s a fine line.


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DB, HSBC Favourable really means that they have a target rate, and if that target rate has been exceeded, say, their target rate is 1.90 on USD/GBP, anything above that is extra.


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CK-G, Société Générale What happens when that rate goes against them? Whenever you talk about hedging there’s an element of speculation involved. When do you put that hedge on, when do you take it off ? And what instruments do you use? That is taking a set of risks. I agree that we shouldn’t be encouraging our clients to take outright foreign exchange risk, but the perfect hedge does not exist.

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DB, HSBC Absolutely, and corporates have become much more sophisticated. Our quants team spends a lot of bespoke time calculating strategies for corporates on hedging structures, which was rarer before.


SB, Euromoney
Moving to the prime brokerage side of things; Jason, what’s Deutsche’s perspective on your prime brokerage business?

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JS, Deutsche Bank The model now is clearly about risk management. If you have a poorly run prime brokerage platform, your collateral calls aren’t fast enough, and your understanding of the settlement risk is poor. Deutsche has been spending its time on the backbone of prime brokerage, which allows us to better understand the assets we have, better understand how to manage those assets, and better understand what our clients’ prime brokerage goals are. In the future, some participants will think twice about coming into the prime brokerage market and others will realize they need to continue to invest more in that core competency to be excellent.

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HB, JPMorgan Do you think prime brokerage made August less or more risky?



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CK-G, Société Générale Undisputedly less risky. The 1998 Russia/LTCM crisis is an interesting comparison in this respect because players were hedged and banks were taking margins, but often they would have a counterparty take a forward position with Bank A, a hedge with Bank B and a bond position with Bank C. The client thought that they were hedged in all their positions but they had risks with each of the individual banks and these were hard to offset.

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EP, UBS And they were all raising their margin rates.



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CK-G, Société Générale That’s right. So there was no easy offset for the end client. Subsequent to that, both clients and prime brokerage providers have become more sophisticated. The risks are more concentrated now, so the prime broker can analyse them more effectively, and margin more effectively. So when there’s risk disaggregation, when your balance sheet’s affected, it’s a much more manageable process under the current structure. It’s a definite competitive edge to becoming a major player in FX to have a well-functioning prime brokerage business.

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EP, UBS Prime brokerage is in demand because a number of trends have conspired to increase its relevance. When it began, prime brokerage was expensive and manual, and now it’s relatively inexpensive and automated. So the service has improved and become more attractive over the last four to eight years. In addition, navigating increasingly fragmented liquidity requires increased emphasis on collateral efficiency. Streamlining post-trade workflows, such as splitting, averaging and reporting, is more important than ever, driven in part by the increasing number of smaller tickets associated with electronic trading in its many forms. So we’ve seen a number of complementary trends make prime brokerage more popular with and essential to both consumers and suppliers.

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CK-G, Société Générale The nature of the end clients that use prime brokerage services has also changed. The world’s top leveraged funds are multi-billion dollar entities now and there are more of them. Back in 1998, as well as a handful of big names suffering, it was a plethora of very small players that just got wiped out. We tend to see far fewer smaller players now on a relative basis. Indeed, despite August’s sub-prime problems, billions have been raised over the last six months by the larger hedge funds. As such, when the prime broker is offering its credit as the proxy credit for the fund I wonder whether the prime broker will really raise prices despite the fact that the price of risk has generally gone up.

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XP, FX Concepts It depends on the end user. Our business really grew once we set up that prime brokerage facility. It’s been stressed this summer, but the system has held up well and we’re seeing that prime brokers are still able to lower fees.


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CK-G, Société Générale When you have a prime brokerage business, to an extent you’re creating a degree of captive business for the bank that is the prime broker for the client. So the fee structure has to be looked at from the benefit that you get from the end client as well in terms of business volumes.

SB, Euromoney Jason mentioned that corporates are demanding prime brokerage-style services. Are you all seeing that?

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EP, UBS We group our prime brokerage clients across seven different client sub-segments, because we think their needs, their behaviours and their risks are all different, and prices should likewise be different. Prime brokerage is not just for hedge funds any more; it’s for anybody who wants to outsource operations, manage collateral more efficiently and have some element of consolidated reporting. I do think credit is becoming too cheap, however. There is an increasing expectation of being able to trade on zero margin, for example. Margin is not a stop loss; it’s a collateral deposit that ultimately serves as a check on systemic risk. We believe markets have recently entered a period of heightened volatility, making it precisely the wrong time to take a historically relaxed credit posture.

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JS, Deutsche Bank I think there are two costs to a prime brokerage. The first is the operational cost, and the other a credit cost. The credit cost is a function of collateral and volatility. This cost changes over time.


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CK-G, Société Générale I think it’s the default issue that’s more key here. You may measure market volatility to drive your margin call but the margin you charge will be a function of the number of defaults you really think you will have, and market volatilities and defaults don’t quite overlap.

Less trivial

SB, Euromoney You talked about certain clients taking some price differentiation. Are those trivial price differences or are they material price differences?

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EP, UBS They will be less and less trivial price differences. We’re very aware of different client needs and behaviours. Operational and trading behaviours need to be evaluated from a market risk, operational risk and default probability standpoint, rather than pretending the service is generic and can be sold to all comers for X per million and Y initial margin. We as an industry have to do a better job of distinguishing between the services and the needs, and provide a more tailored approach to pricing.

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PL, Polar Capital Which kind of fund do you think will be most exposed to changes in price?



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EP, UBS Those that take the greatest leverage.



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CK-G, Société Générale But I think the biggest funds have some negotiating power, and the biggest funds can probably afford to invest in processes that allow them to manage risk better their own underlying monies.


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HB, JPMorgan But that’s underpricing liquidity again in a way that the market was underpricing liquidity this summer. If you’re a tiny, highly leveraged fund and something goes wrong, it’s trivial as far as the whole market is concerned, whereas when you’re trying to get out of those really big positions that are very leveraged, the market sometimes struggles with the liquidity.

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XP, FX Concepts How do you measure the degree of leverage?



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EP, UBS It’s both part of the initial credit due diligence process and the continuing monitoring of position risk. Put simply leverage is determined by evaluating position sizes relative to margin and other excess cash.


SB, Euromoney
Do you ask them what they’re doing with other banks? And if you did, would they tell you?

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EP, UBS It’s probably fair to say requests for transparency into both risk and liquidity are increasing. These are also dimensions for pricing credit. If a client has one or two prime brokers, you can compare observable leverage with unobservable leverage, which implies a level of transparency. If you have a fund with one strategy entirely cleared with you, you can take a more lenient credit posture than you might with a more complex entity with multiple prime brokers whose FX positions represent a small percentage of their overall risk.

SB, Euromoney And what’s the pressure on FX departments from the credit approval parts of your institutions?

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EP, UBS We’re having a lively debate about stress risk. While we’ve always stress-tested clients, we’re now assessing whether or not those stress tests are adequate. A 10-year look-back is only valuable if it’s a good predictor of what happens in the future. So should we be looking at position concentrations and liquidity? I’ll be surprised if the whole industry doesn’t give this topic increasing focus going forward.

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CK-G, Société Générale When we look at stress testing we all have VAR modelling, but we also have lots of scenario analyses. As Ed said, you could look back 10 years without getting anything representative until you reach something like a LTCM. So you look back beyond that. And we’ll look at fat tails as well, and expected shortfall modelling, in order to ensure we have something in place that gives us the right level of confidence for changes in volatility.

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RB, Investec If volatility does increase, people just need to take smaller position sizes. Your performance target hasn’t increased because volatility’s increased, so if you rely on the same information ratio historically, you should just take smaller position sizes and therefore it should pass through.

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PL, Polar Capital If you’re a macro manager, your performance target probably goes down because you’re not trying to keep up with all these guys who have just been leveraging long emerging markets equity markets any more.


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CK-G, Société Générale As a leveraged player your targets might juggle between the return on equity markets, bond returns, or the levels of short rates. So for a hedge fund it was great when the equity markets were going down between 2000 and 2003, and when interest rates from the Fed were 1%, because your benchmark was low, so the 10% return was fantastic. But if we do get inflation back and nominal yields in the US head towards 6% or higher, then your return expectations could be different.

SB, Euromoney If a bank starts to ask you questions they hadn’t asked before, do you feel that the market still has capacity for you to just hop on to another prime brokerage machine? Or do you feel that you would prefer to yield to the bank’s requirements and stay with them?

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PL, Polar Capital It depends on why they’re doing it and on the environment. If you can see that the banks have just been hit and volatility’s gone up, you’re going to look at the marketplace and make an assessment of whether the price should’ve gone up or not.


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CK-G, Société Générale My guess would be that even if we do go back to a volatility period of 10 years ago and people start applying the margins that were applied then, no one’s going to change. The sophistication of the risk management systems has improved so much over the last 10 years, and the effort to change is extensive, that in most cases it’s a non-issue.

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EP, UBS And the tricky thing with stress testing is that, even if volatility goes from five to nine, the full risk is not really reflected, because any discussion of vol assumes that markets are normally distributed. Yet there’s plenty of evidence to suggest they’re not. Stress testing provides another perspective on risk and helps us set margin rates that are most appropriate given market conditions.

SB, Euromoney So let’s move on to electronics and the algorithmic space, which is not as exciting as it once was, but is still a huge driver of volumes. What is new?

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JS, Deutsche Bank The model that has existed in the algo space has changed even in the last seven to 12 months. There are fewer and fewer latency game players and, of the top 10 banks, most of them now are making the right price most of the time. So there has to be something behind that. It could be the world’s greatest black box, or it could be a retail thing, by which I mean somebody doing a lot of tickets. If it’s a black box, these guys clearly need prime brokerage and infrastructure. If it’s a retail thing, how much of that is just renting a platform in terms of their ability to process tickets? It’s a different vision from what we had nine months ago where algo was going to take over the world and there was going to be a C-to-C exchange-based model in FX. I don’t think that has as much momentum now.

SB, Euromoney What about algorithms simply as execution efficiency?

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JS, Deutsche Bank I’d love to take some of that from equities into FX. There are some structural hurdles that prevent us from doing that. Not having a consolidated tape is probably the biggest hurdle.


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EP, UBS Mifid could play a role in hastening the process. That aside, algo is becoming a hackneyed term that can mean different things to different people. A limit order is an algo. It’s just a really simple one. At the other extreme it relates to the trading tactics of market-makers who do thousands of tickets per day. It can also mean something much more benign, for example sophisticated rules-based execution to prove best execution or automate the management of slippage.

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CK-G, Société Générale When you do trades with most clients you don’t do a massive portfolio of currencies. It’s concentrated in one or two or three currencies only. The equity model is often many different equities being sold or bought, using the exchange as a hedge, looking at the sector variability among them, so that you try to disguise the whole flow. If someone wants to do euro-dollar in several billion, what can an algo, in this sense of the term, do for you? You just have to sell euro-dollar. That is a real difference between the equity market and the FX market.

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XP, FX Concepts Although there are aggregators now that will take that two billion or whatever, and just piecemeal tick it off so that everybody that is pricing gets hit by a little piece of it.


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JS, Deutsche Bank I don’t know if aggregation engines are a long-term viable model, because they tap into liquidity that doesn’t exist. So all the major banks are putting 30 units of liquidity into this platform and that platform. If you pay me in all of those platforms, in the long run I have to widen my prices. That may be the model, we have much more volume coming in, but it’s not pooled as efficiently as it was earlier. Are we going to have re-pooling? And will prime brokerage step up to the role? Because we’re not in a sustainable position.

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CK-G, Société Générale Algos for SocGen probably means proprietary trading, looking at small price discrepancies across currency pairs, or looking at mean-reversion trades. If you think something’s moved too much against your model, you might sell it, hope to buy it back, or put a stop on it. It’s proven very profitable for us. It’s also given rise to large turnover volumes for us – we’re the single largest provider of liquidity on EBS, which allows us also to disguise a lot of our client flows.

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RB, Investec It’s about extracting inefficiencies in markets. The moment they’re all extracted, people won’t make any money out of it, so it will decline. If the cost of transacting increases because of prime brokerage fees, because the price of risk becomes higher, then high-frequency trading will become less attractive.

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CK-G, Société Générale It does have the additional benefits of providing some liquidity in the marketplace though. If you’ve got, for example, leveraged money with application programming interfaces plugged in that are on both sides of the market and providing trading prices, it can help market liquidity in times of normal functioning.

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PL, Polar Capital I think you’re both right. The alpha element will disappear. It will just be the way banks manage large orders more efficiently using the liquidity that already exists in the market by looking at those correlations between different currency pairs, and taking that order to the market in the most efficient way. The end user will get a better price, because banks will continue to compete and the market will become more efficient. But in the end there won’t be any alpha. At the moment there are still a few funds trying to sell themselves as being able to generate alpha but it won’t last.

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HB, JPMorgan Did algos continue the high volumes through the tough times this summer? Did they perform well?



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EP, UBS I think the peak we saw was 4,300 tickets in 15 minutes in August, so they were definitely as active, if not more so.



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JS, Deutsche Bank Yes, one of our days was five times our average.



Alpha beta blurring

SB, Euromoney Over time there seems to have been a blurring in people’s definitions of FX when they talk about alpha and beta and overlay. What real products are in demand at the moment and why?

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PL, Polar Capital There are two different things. If you have a hedging programme on overlay, you reduce the volatility of the underlying assets and then you can use the volatility that you’ve saved in an alpha programme. If you’ve got an information ratio above zero then you’ll generate some alpha.

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XP, FX Concepts I think there has been a structural shift. Traditionally, people wanted to protect themselves on the downside, but they wanted to capture some positive returns if currencies went in their direction. Over the last 10 years there’s been a shift away from looking at that traditional overlay towards alpha generation strategies. At that point they need to ask what is beta on FX.

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HB, JPMorgan There’s another structural shift. The alpha sources have all been ‘beta-fied’. If you can come up with a source of alpha that is systematic, you can create a beta from it. There are many systematic sources of alpha in the hedge fund space, and those can be and are replicated by a number of organizations on the sell side.

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RB, Investec Deutsche have an FX beta index, don’t they?



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JS, Deutsche Bank Correct. Ten years ago carry was alpha, and now we have a carry index, a purchasing power parity index, and other indices. You can buy those for very little from us, and then go back to Harriett and say: "How are you going to outperform what I just bought?" That’s a great thing for the asset management business too, because the biggest hurdle for banks and asset managers is getting the large quantity of non-FX participants to invest in the FX markets. Deutsche’s out there saying: "Here’s the standard index for beta. If you want to buy alpha, let’s have a discussion about that." As long as we all can agree an FX beta, we have the "S&P 500" and we’re ready to invite the other 99% of investors into the FX markets.

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VD, Bank of America For people who thought FX was an asset class, the last couple of months did a lot of damage in that there was no diversification. Talking about carry trades, every trade was kiwi/yen and everything was correlated.


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PL, Polar Capital Do you think so? I think a lot of people bought a lot of model-based FX products, which generally came out of back-tests. Those back-tests all worked out that carry had done really well and that over a very long period PPP had done well, and so a lot of people bought the stuff. It probably will turn out to have been a damaging period for that sector of the FX market. Everyone had the same model, and not only didn’t it diversify you from your other FX managers, it didn’t diversify you very well from your fixed-income manager. So what was the point? If you look back over a longer period, discretionary managers in FX do still diversify your portfolio and have still generated alpha over the medium term. We’re probably not really going to see the value of the discretionary FX managers until we see, not beta within FX, but beta outside FX, when equity markets have a period of going down again, or bond markets have a period of not generating such attractive returns. Then we’ll have another period where the discretionary part of the FX market will be popular again, because people can replicate all of these models for nothing now.

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XP, FX Concepts I expect that anybody who’s reeling, who’s not in FX, has got to be saying: "What the hell are these guys talking about, beta and FX?" We need to address that.


SB, Euromoney
Just to be clear: the definition of FX beta here is simply an index or algo that replicates what would previously have been thought of as a strategy that moved you up the efficient frontier?

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HB, JPMorgan Yes. You can now figure out and replicate a lot of those strategies so the days of being able to charge two and 20, or five and 20, for some of those things is probably behind us.


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EP, UBS Do you think fees in the industry are very vulnerable as a result?



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HB, JPMorgan I think you’ll see more separation into winners and also-rans, and it’ll be difficult for some of the smaller hedge funds.



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PL, Polar Capital Overall I’d disagree with that. If asset markets continue to do well, people will continue to pay for hedge funds to provide them with the leverage that they won’t provide for themselves. People will continue to be happy to pay those fees as long as the hedge funds are willing to run high enough levels of risk. In a world where asset markets are doing badly, if hedge funds can show that they can generate any kind of positive returns, then people will be even more happy to pay for it, because, frankly, they’ll be pleased to receive any kind of return. Hedge fund returns will only get compressed if they are bearish and asset markets go up.

SB, Euromoney Finally, what do you think will be the most interesting business challenge of the next 12 months?

Inflation issue

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CK-G, Société Générale I think inflation is going to be a structural issue for economies going forward, even if the world economy slows. And inflation volatility can help rate and currency volatility. I also think that the US dollar will start to lose its hegemony as the dollar peg is causing many problems for its adherents, especially in the Middle East. The euro is nearly a decade old and is surprising us all by its resilience and the effectiveness of the European Central Bank. In the recent sub-prime crisis, the ECB was the leader in innovative ways to deal with the wide OIS-Libor spreads – is the Fed the world’s global central bank now?

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VD, Bank of America I think the movement of liquid products closer together is very interesting, synergies between and among FX, commodities and rates, moving businesses closer together. The growth of exotic options for financial innovation is an interesting phenomenon. And we all work in a very commoditized space, the challenge will continue to be how we differentiate ourselves.

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RB, Investec The biggest challenge both for Investec and the industry is learning to recalibrate for and cope with a higher mean state of volatility. We have all been calibrated to the low-vol world of the last few years. So we have to readjust. Picking up on Harriett’s comment, the key thing is not just to be leveraged FX beta. We’re in this business to make alpha, and alpha is producing absolute returns.

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XP, FX Concepts How the world copes with the dollar decline will be a major theme through 2008. How will it be possible to continue when there’s slowing and deflation in the west and increasing growth in Asia?


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DB, HSBC At HSBC we’ll be putting our energy into emerging markets, and I really believe the future of the foreign exchange markets hinges on continued flexibility and growth in emerging markets. We’re pretty much saturated in G10. I can’t say I totally agree with the currency unions that were mentioned. We think Gulf monetary union is going to be delayed, and we can’t see it in Asia at all. Monetary union usually occurs for political reasons and the economics come second. We saw that in the eurozone. If it didn’t work like that, we’d be in a different paradigm. But with that constraint, I can’t really see these unions happening for the moment.

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PL, Polar Capital As soon as someone invents a mousetrap it becomes commoditized pretty quickly, so I tend to try to analyse what’s going on in a hopefully slightly more quirky way, to find something that can’t be replicated and doesn’t have a correlation with what everyone else is doing, to generate a positive return. I hope we move away from a world where, as long as you strap on enough carry, you’re fine. It may be pretty successful but it’s not very sophisticated. I hope and I expect that we’re heading for a world where macro trends become more interesting, volatility rises and it’s not going to be all about leverage and carry.

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EP, UBS The convergence of the alternative community and the traditional asset management community is a very interesting trend. It suggests that the services we provide to hedge funds will probably evolve into more sophisticated offerings for a much more complex set of money management organizations than we deal with now in prime brokerage. This convergence will evolve just as the banking industry goes through a retrenching period, resizing itself for the opportunities that can be expected one to three years forward rather than what we anticipated a year or two ago. And if prime brokerage is ultimately a business in which you lease capacity to your clients, we must strive to be in a position to provide that sort of outsourced efficiency to an institutional investment community that will have some rapidly changing needs over the next few years.

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HB, JPMorgan Our business priority is obviously to continue to invest in alpha. In addition, asset management firms like ours with great breadth need to be able to do a range of different strategies more efficiently, more cheaply and more competitively than the hedge fund industry, as well as continue to have quite an acquisitive approach to some of the organizations out there.

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JS, Deutsche Bank FX is entering a golden age. Both on the client side and on the bank side it’s proving to be a space that will attract more assets and more talent, and that’s something that excites me in a big way.

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