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| Capricorn in the News | » Back | | | | -- Interview with Mikkel Thorup
CIO and Founding Partner of Capricorn Asset Management.
July 22, 2009 (www.TheGestaltShift.com).
I had the priviledge of getting to chat with Capricorn Advisory Mgmt. CIO/Head Trader Mikkel Thorup a few weeks ago. Mikkel is a professional with over 15 years of experience in the financial markets. His experience as a trader on the Prop Desk of Smith Barney eventually led him to form the Capricorn Group where he is now CIO and head trader. His excellent performance in his new Capricorn FXG10 Segregated Portfolio has attracted a nomination from the Hedge Funds Review 2009 European Performance Award. I found Mikkel to be a rather pleasant person to speak with and was open to sharing his insights. This post contains an exceprt from our interview and focuses on market dynamics and the carry trade.
You once said, “The human brain is far superior to a computer,” in reference to trading. But doesn’t it become difficult to make discretionary calls with so much information available?
Yes. We as a company look at more systematic strategies as well, but I believe that [having] long time experience in the markets is a big plus for making trading decisions. You can use your discretion to keep yourself away from getting into too much trouble when you see excess volatility in the market. In [such an] environment an algorithmic trading system would have difficulty because [it] usually takes a while to adjust to a new type of market environment. We may say that the market is going to go up based on a technical perspective, but there is far too much volatility that we have protect the cash of our investors so we would use discretion to also cancel out a trade.
How do you deal with the short term noise of the market, considering that you have some short term strategies in addition to medium term ones?
The main noise (randomness) in the markets is around the fundamental releases. We try not to have positions around key economic events. In principal the only way we look at these economical events are by knowing when that they are and having a filter saying that FOMC meetings, ECB meetings, and NFP are important, etc. We tend to be neutral around these events.
The carry trade has been a controversial strategy that tends to polarize opinions. Some traders and managers would argue that there is little or no alpha to be extracted from carry trades, because they claim that returns are mostly based on taking on risk rather than buying value, while others maintain that the market overprices risk premium in high interest rate currencies so there is an opportunity to take advantage of mispriced rates. Do you agree or disagree?
Are we trying to buy value in the markets? I wouldn’t really say yes. We are not philanthropists here trying to make things better for developing markets-we’re trying to make returns. I think carry currencies are still a very good source of alpha if you try to do it smartly. The way we try to deal with it is by focusing on the traditional G-10 currencies such as the Australian and New Zealand Dollar primarily against the USD (for today anyway) and JPY. Technical analysis is our entry [method] for these type of trades and we are long carry only. And we use options to hedge out our currency exposure. There’s been plenty of opportunities to extract alpha out of being long carry trades even though they have been actually going down because there has been a lot of risk unwinding. As long as you can protect your downside in some sort of way so that you don’t have full exposure when carry trades start to go down [then you'll be fine]. With those types of currencies, when they go down, they go down fast. The first indication of risk unwinding in carry currencies is that everyone wants to get out and go into cash. Just being long carry, walking away, and believing that you’re going to make money especially with leverage put on can be pretty damn dangerous.
Isn’t it difficult to deal with the violent unwinds associated with carry trades?
If we see very violent moves, say a move of over 3-3.5% in one day, we would simply square out and wait for entry at a better level. From a technical point [of view] we are traditionally more medium term trend followers in the carry currencies and being long only carry.
2007 and 2008 represented completely different market environments. Can you explain how you adapt to such changing conditions?
From an option trading point of view volatility is good for us so we don’t really change anything [if volatility goes up]. From a spot trading point of view if we are concerned about a change in direction, traditionally we will scale back on our decisions until we feel comfortable in that market environment. I think in general we will always see shifts in the trends. It always happens with a lot of volatility to start because the market players are fighting to find direction and I think it’s good at that time to then step back and let them fight and find out which way we’re going to go first. Let the market show who’s going to win the battle then slowly creep into it again.
Mikkel Thorup currently manages the FXG10 fund. To find out more about investment possibilities please consult the Capricorn website.
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