Ian, you began advising clients over 17 years ago and established Naismith Capital Strategies in 1996
With this substantial experience behind you what have you discovered about the skill-sets required to become a successful money manager?
Know how to act disciplined when a trade is not going your way
No matter if you are trading stocks, bonds, commodities, real estate, currencies, etc
- begin with a predisposed plan of action when the trade is moving against your desired outcome
There are really effective ways of accomplishing this discipline – whether it be hedging techniques, trailing stop loss orders, selling at predisposed profit targets, etc
These all are logical and practical, but the meaningful part is pushing the button once a confirmation has sounded
In addition, when the markets are too volatile for trading, simply sit aside and watch
You formed Sarasota Capital Strategies with your business partner Anthony Welch, in 2002
What prompted you to set up the company?
It happened due to a turning point in philosophy and strategy for both of us after the roaring 1990’s
In the 1990’s, Tony and I bought and sold individual stocks – which was quite easy, given the market conditions
When I mention “bought,” I do mean we bought on the dips, and when sells occurred, it is because a stock was not “going up fast enough
” When 2000 came and delivered a bear market for the previous years’ high flyers, buying on dips did not work
Thus, in the latter part of 2000, and especially starting in the early parts of 2001 and lasting into 2003 – judicious allocations and stop orders became the norm
During that period, Tony and I decided to concentrate on trading indexes employing technical analysis using relatively new items called ETFs
We had known each other well since 1992, and since we were in concert with our thoughts, we decided to combine forces
It is hard to believe the roaring 1990’s was more than a decade ago
What type of investment style does the firm undertake?
We are an absolute return style firm that primarily uses technical analysis with common sense overlays
Once in a while, unusual occurrences happen that provide opportunities that cannot be possibly measured by a rigid technical model
A great example, recently the Powershares DB US Dollar Bull ETF (UUP) could not issue new shares
Within minutes, demand overtook supply and the ETF was trading up 2% while the US Dollar Index was flat
In less than 2 minutes after this anomaly, we started selling the majority of our 21% position of the ETF to realize a nice gain; that, in a perfect technical world – should not have happened
By the end of the day, we replaced the sold shares for another fund that was tracking the US Dollar efficiently and wrote covered calls on the small amount of remaining shares of UUP
On the flipside, fourth quarter of last year, our firm simply hedged through most of the mayhem
Because of unprecedented volatility, momentum and/or contrarian models did not work, so we chose the boredom of neutrality
It worked beautifully
Sarasota is the investment advisor for The Strategies Currency Fund, a series of the Northern Lights Fund Trust
What are the investment objectives of this fund?
The main objective is to realize consistent total return with an emphasis on keeping the draw down and volatility to a minimum compared to individual currencies and other asset classes
Regularly, advisors who have invested in the fund tell us “we don’t have to worry about your fund in our portfolios
” This is what we’re all about
Keeping the fund consistently performing is a balancing act between the simultaneous use of non-US Dollar currencies and the US Dollar Index
We believe using those opposing currency groupings help smooth out the return of the fund
Historically, in times where non-US Dollar currencies are showing strong trends, we tend to correlate with the trend – and when the US Dollar Index shows a strong trend, we tend to correlate with the trend
The combination of capturing ranges of return when non-US Dollar currencies are strong, and capturing ranges of return when the US Dollar is strong – gives us consistency
What are your main day-to day responsibilities in managing the fund?
We make sure the fund is adhering to the models that were created and keeping our eyes on opportunities that cannot be measured in a technical system
I’m a system driven person and Tony is an opportunity person – it works out very well
Early each morning, we know exactly where our exit or entry prices are on a currency by currency basis
If either limit is breached, we take action
Once trading begins, we look for intraday irregularities that might become opportunities
We also make sure that the trades are fairly priced compared to the intrinsic value of the items we are trading
Besides the trading and monitoring, we do the normal mutual fund type things like prepare written reports, approve expenses, marketing, etc
Joe Garbade, our operations person, does an incredible job with day to day reporting and compliance
The Currency Strategies Fund invests primarily in exchange traded products and/or mutual funds, the value of which are tied to currency prices What do you like about exchange traded products and what advantages do they offer for investors?
The vast majority of the mutual fund clients and audience to the fund are advisors and regional brokers
Right now, we believe that a fund of funds makes sense because the items we choose to trade do consistently track the prices of the currencies they are designed to replicate
It is easy for advisors and other professionals to use our fund because most understand how ETFs or mutual funds work, and it is simple for them to track as well
They can explain the fund it to their clients
As the fund grows, we will be integrating other tools for trading that will complement our ETF trading, but at the same time, give us more choices, liquidity, and at the same time will reduce overall expenses of the fund
In other words, we want to use tools that will get us to our goal – and sometimes ETFs are the way to go, and sometimes they are not
You use proprietary technical analysis to determine which currencies you believe will outperform the U
S
Dollar
What tools do you use to assist you with this and what momentum characteristics is the analysis based on?
We are looking for out performance from either side of the pair, whether the winner is the US Dollar or not
Primarily, we have used Tradestation for building our unusual indicators and auditing of the code is verified by good old-fashioned Microsoft Excel
Momentum is measured on the ascension on consistency of price, but, we do receive contrarian sells when consistency is compromised and contrarian buys when consistency is re-established
One beauty of Tradestation is that you can view your indicators in a columnar format that is sortable
This eliminates the need for 6 different video monitors in the workspace
We can see more actionable information for trading on one 21” screen than we’ve seen on multiple screens in other offices
We like it simple
The hard work has already been done developing the models, thus, the trading signals derived from that hard work is clear and simply displayed for action
What measures determine what initial allocation to a currency you may make and then whether to increase or decrease it?
This is not mandated by prospectus, but, we use equal weighting due to the overwhelming history that equal weighting enhances performance starting around 3 year rolling period and improves dramatically in longer timeframes
Equal weighting also smooths out volatility in portfolios
Thus, we have imposed investment limits on a currency by currency basis
Currently, the maximum investment limit we have for each G-10 currency ex-US Dollar is 7% and 4% for each emerging market currency
By prospectus, gold has a 10% investment limit
However, by prospectus, the US Dollar index can receive 100% allocation if it is in a raging bull market or is having a sharp rally because we would like to participate in those events as much as possible
It would be rare for us to be completely out of the US Dollar Index or 100% in the US Dollar Index
We can also expose the fund to 100% short term safe havens in times that excess volatility is occurring
The increasing or decreasing of each position happens when we receive a signal from our model
The adjustments are incremental to reduce the amount of noise trading when volatility is occurring
What key steps do you take to mitigate the various types of risk associated with your investment style?
By nature, the inclusion of all types of currencies including the G-10, emerging markets, gold, and US Dollar Index gives us an actively managed single solution palette that advisors cannot find in the United States right now
The fact that we are not strictly an anti-US Dollar play only helps mitigate risk
In addition to the currency choices, the allocation limits, predisposed stop loss triggers, hedging techniques, covered call writing, and the ability to retreat to 100% safe havens gives us many levels of insulation in nasty markets
Do you expect to see significant growth in currencies being packaged in the form of new exchange traded products and what shape might these take?
Well, we don’t see much more need for duplication of single G-10 or really liquid single emerging market currencies
However, we believe the market may see many baskets of various currencies
Wisdomtree has many currency baskets that have been in registration for quite some time
Of course, it will take demand from advisors and investors to make currency ETFs successful
What's the average length of time that you hold your positions for?
We don’t limit ourselves to time holding periods
When we receive a signal or see an opportunity – we act
Some of the biggest mistakes made by advisors are adhering to a predisposed time period
What advisors should be adhering to are price periods – meaning, if the price of an item reflects a trade that is capturing positive return with acceptable amounts of volatility, then it makes sense to participate whether the time is a week, month, or year
In volatile markets, our holding periods are compressed
In streamlined markets, our holding periods are extended
We would rather have more turnover with less volatility and draw down, than little turnover with more volatility and draw down
Risk Management, design and back testing of strategies and optimising trade execution are just some of the areas where trading tools and technology are now making a significant impact on how many firms trade currencies
How important is trading technology to your own team and in what ways does it help you maximise trading operations?
Trading technology is everything to us
It is imperative that we understand the past before starting a trading system using real money, so, we make as many mistakes as possible in the backtesting world
It requires numerous hours of studying what algorithms – based on history - increase chances for consistent, repeatable results and at the same time, we defer that the future may be a totally different road than the past
With that said, having smart trading habits improve total return
This means finding patterns intraday for buying or selling to improve overall cost
It also means not overpaying or underselling in relationship to intrinsic value
We have the technology to monitor these items in real time
However, technology means nothing if you do not translate the technology into action
The amount of money saved due to our trading diligence is astounding
Is your trading technology infrastructure built in-house or provided by specialist vendors?
The trading technology is provided by specialist vendors
For real time tracking of intrinsic value, volume and bid-ask spreads/sizes, we use Tradestation
The intraday trading algorithms were also built in Tradestation
We use HydraTrade for executing the trades
So we have Tradestation on one screen and HydraTrade on the other
It is very simple
In addition, all of this is easily portable
When Tony and I travel, it is almost seamless to trade
As a backup, we can call the head trader at our clearing firm, Ceros Financial Services, for trading purposes
We have a long term relationship with the folks at Ceros, and we know we can count on them
If we need to search for liquidity for buying or selling ETFs with shallow volume and/or large bid-ask spreads, we can rely on WallachBeth to find the liquidity
So, a combination of machine and human resources is the way to go
Do you plan on utilising any algorithmic trading techniques or are you already applying them?
We are already applying algorithmic techniques – however, the trades are being done by humans, not automated computer only trades
It is algorithms that dictate what currencies we’re in, the allocation of each, and how we trade in and out of the currencies intraday
In the future, where are you going to be looking to grow your business and search for new and innovative ways to utilize your investing expertise?
Much like we have already
A)
Identify gaps in the investment landscape; B)
do homework and build intelligent models that advisors can use and not lose sleep; C)
create and launch the product; D)
educate and convince the advisory community to fill the gaps that exists in their portfolios
The beauty of this job is that there are still many opportunities in the investment landscape and we would like to have a stable of products that fill those gaps
They may come in a number of forms, but the intent is to provide value to the investor
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