Institutional Investor's Alpha Magazine - November 2007 - (Page 26)

Bill Lipschutz exhibit at the city’s Museum of Modern Art. But this ofﬁce is also an elegant living space, as befits a man for whom work and life are inseparable. Lipschutz shares the apartment with his wife, Lynnelle Jones, Hathersage’s director of client services and new product development. Lipschutz, 53, didn’t set out to be a trader. While pursuing a BFA in architectural design at Cornell University, the native of Farmingdale, New York, got interested in the markets after he inherited a stock portfolio from his grandmother. Lipschutz learned to trade equity options in 1981, when he landed a summer internship at New York–based Salomon Brothers. After receiving an MBA in ﬁnance from Cornell’s Johnson Graduate School of Management in 1982, he joined the firm and was given a desk 20 feet from then-chairman John Gutfreund. For the new recruit it turned out to be the right place at the right time. Salomon was about to launch a currency trading opera— CYNTHIA STEER, CHIEF tion, and soon afterward the RESEARCH STRATEGIST, Philadelphia Stock Exchange ROGERSCASEY started listing currency options. Because of his facility with options, Lipschutz was tapped to help set up and build the new currency trading desk. By 1985, Salomon had garnered close to 80 percent of the open contracts in currency options and 50 percent of the volume on the Philadelphia exchange. “The product exploded in terms of volume and popularity,” he recalls, “and it was my baby.” Lipschutz proved adept at forming the relationships — and vital information flows — that are the lifeblood of a discretionary currency trader. In the pre-PC, pre-Bloomberg 1980s, he and most of his peers relied on their own judgment to winnow trading ideas from the constant stream of macroeconomic and microeconomic data. Today discretionary traders like Lipschutz are in the minority. About two thirds of currency traders are systematic, meaning that they depend on quantitative models. An over-the-counter, round-the-clock business, the global foreign exchange market has a capitalization that almost defies measurement. The Bank for International Settlements — the central banks’ central bank, headquartered in Basel, Switzerland — records annual daily currency turnover. In April 2007 it calculated that an average of $3.21 trillion in currency traded each day, up from $1.88 trillion in 2004. Currency traders transact deals through banking relationships rather than on an exchange. They can buy currency outright or through various derivative strategies — using forwards or options, for example. Currency trading is a relative-value strategy in which a long-short pair is purchased as a unit, with one bought and the other sold. The popular “carry trade” involves pairing a currency from a low-interest-rate country like Japan (sell) with one from a high-interest-rate country like Australia (buy), in an attempt to earn the interest-rate differential. The ability to beneﬁt from these differentials is one of the lures for new investors, Lipschutz says. With $250 million in assets under management at Hathersage, Lipschutz is hoping to capture a portion of the new money he sees heading into active currency management. Such investment consulting ﬁrms as London’s Mercer Investment Consulting, Russell Investment Group of Tacoma, Washington, and Arlington, Virginia–based Watson Wyatt Worldwide have been vetting Hathersage. The eight-member ﬁrm has a client service ofﬁce in South Norwalk, Connecticut, and a portfolio manager in Los Angeles. Hathersage is opening a New York–based dedicated trading ofﬁce in early 2008. From January 1992 to September 2007, Hathersage racked up an average annual return of 17.95 percent in its short-to-intermediate-term fund and 12.32 percent in its short-term fund. During the same time the Parker FX index had an average annualized return of 6.41 percent, and the Parker discretionary index returned 6.38 percent. Both indexes are maintained by Stamford, Connecticutbased Parker Global Strategies. Industry experts differ on currency managers’ prospects. In 39 searches during the past two years, Mercer has placed $11 billion in client assets with active currency managers. “Because of the weak equity markets in 2003 and 2004, people were looking for anything that would add value,” says Michael Lewis, a Toronto-based consultant with Mercer. “At that time currency had good returns and good information ratios.” Cynthia Steer is chief research strategist at Rogerscasey, a Darien, Connecticut–based investment solutions firm with some $325 billion in assets under advisement. She believes that with inflation expected to increase and currency valuations undergoing major shifts that are affecting country valuations, the need for currency investing is urgent. “Currency seems to be an issue that American institutional investors do not want to embrace,” Steer says. “If they don’t start to attack this issue through the committee and investment process, they will be severely penalized.” Short-term funds like the one at Hathersage have taken their own punishment from the recent market volatility. The fund was down 1.35 percent this year through the end of September, while Parker’s index of discretionary currency traders eked out a 1.89 percent return. Still, Hathersage’s intermediate-term fund gained 8.90 percent during the same period. Lipschutz took a short break from trading on a recent Friday evening to discuss the outlook for the currency markets with Alpha Senior Writer Frances Denmark. Alpha: What is causing growth in foreign exchange trading? Bill Lipschutz: The entry into the market of several new “Currency seems to be an issue that American institutional investors do not want to embrace.” and very large institutional players. You’ve got central 26 • INSTITUTIONAL INVESTOR’S ALPHA • NOVEMBER 2007

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - November 2007

Institutional Investor's Alpha Magazine - November 2007 Contents Letter from the Editor Longs & Shorts Pension Corner: Patriot State The Good Guys: College Connection Interview: Currency of Change Cover Story: Comeback Kid Strategies: Masters of Art Research Center: Alpha Awards: Top Technology Providers Top Analysts Alpha Bytes: Critical Choice Unhedged: Commentary: Banking on a Bubble

Institutional Investor's Alpha Magazine - November 2007

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