Capricorn contributes to FX Week article

At the FXInvest Europe conference in Zurich on March 8, foreign exchange investors and fund managers met to discuss key issues driving the FX market in 2011 and the possible impact of new regulations. End Quote

(1888PressRelease) March 22, 2011 - Farah Khalique reporter for FX Week, interviews three institutional currency market participants to discuss the implications of a stricter regulatory environment.

Mikkel Thorup, founding partner and chief investment officer, Capricorn Asset Management, Zurich

At Capricorn Asset Management, we focus purely on foreign exchange and have just under $300 million of assets under management. We use an intra-week technical-driven discretionary strategy, so we have a relatively short-term horizon for trading. In this industry, people are still trying to get their heads around whether forex is an asset class or not. More and more people are getting into currencies, but I think many investors have been a bit sceptical as to the performance of currency managers and why FX should even be in their portfolio.

Clients are more and more interested in discretionary managers because they can meet their currency manager and discuss his risk management strategy; you can get a more personal feel as to whether that person is calm in rocky situations. With systematic trading and black-box approaches, investors have difficulty seeing what is going on in those black boxes, and have been scared off with bad experiences.

Regulation is a huge theme these days, and from a manager's perspective it's a hassle. It adds another layer of complexity in terms of the operations of a currency manager. We may have to have a bigger headcount and hire somebody to make sure the trade reporting is done correctly. Central clearing costs are minimal, but they are still there; costs are always an issue because we are paid on a performance fee basis. However, over-the-counter derivatives regulation is not going to have a huge impact on us, because our trading style can easily be implemented on exchanges. In principle, we could also execute our trading via futures on the Chicago Mercantile Exchange.

Richard Morrish, fund manager, Peak Partners, Geneva

The biggest change in the asset management industry is that people have started viewing foreign exchange as a proper asset class and not just as a short-term investment. Investors now see it as something you can trade actively, both for the short term and the long term. People also want transparency - the debacles of 2008 and 2009 saw them hit the wall because they were very much invested in assets that were neither liquid nor transparent. Customers now want something they can value pretty much straight away. I'm a strong buyer of the yen and swiss franc, which is contrary to what a lot of people think. I believe the swiss franc is going to hit 63 centimes against the dollar and GBP/CHF will hit parity. I think we're in a secular bear market now; the Swiss National Bank has done a lot of intervention and has left the market naturally long.

If clearing is introduced by derivatives regulation, customers will ultimately pay for any extra clearing costs, but it's built into the structure of the fund. That's the way it should be. We're an absolute return fund, and the customer realises there's a cost in doing business for it. When I started in the futures market, the clearing fee on the London market was £1.20 and now it's a few pennies, so I think we will see the same happen again. It's so small as to not really make a difference. I think clearing regulation is a good thing because it removes a lot of the counterparty risk.

Philippe Peress, founder, Harness Investment Group, London

Understanding foreign exchange is about appreciating there are many drivers that lead to price movements and FX rates. In the current environment, the quality of a country's balance sheet has a significant impact. One needs to fully appreciate all aspects of a country's balance sheet, which encompasses the government, corporate, banking, household and external position of the country. I believe more and more investors are starting to adopt this philosophy within their investment framework. We look at the world in terms of asset and liabilities. The dollar, which suffers from twin deficits and a severely under-funded social security and healthcare system, is clearly a liability. This is especially the case in an environment where investors still have too many dollars in their portfolios. The primary assets for us are the Singapore and Canadian dollars, Malaysian ringgit, Chinese renminbi, Brazilian real and Norwegian kroner. We invest in FX spot and forwards with a maximum maturity of one year, yet the majority are three- to six-month maturities. We do not believe there will be broad-based regulation of the traditional FX market.

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