Momtchil Pojarliev
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Some Like It Hedged

BNP Asset Management's Pojarliev discusses a variety of options to address foreign currency exposures. Although there is no single best-practice solution for addressing foreign currency exposures, institutional investors have three main choices, he says.

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January 1, 2005

Trading Strategies Made Easy

By Editorial Staff

Smith: By constructing giant spreadsheets. They've either tried to find things or have stuck with the standard known pairs and quantities. Klondike allows you to put in your own statistical filters and scoring systems. You can score pairs and select them based on statistical criteria. It won't tell you those pairs make any money. You would have to place those pairs in a trading strategy and simulate the trading strategy in something like Yellowstone to see whether it makes any money. Klondike lets you cover a lot more territory a lot faster.

Traders: Someone told me recently that all the pairs were known. That you can't make money trading them. Is that so?

Smith: The known pairs are known. Whether or not you can make money off of them is not only a function of knowing the pair. It also depends on the sophistication of your pairs trading strategy. I can identify a pair that has a mean that it will revert to. And I'm really good at identifying that it has deviated from the mean. So what do I use to pick that? Do I look at regression? Do I look at ratio? To understand that it has deviated from the mean? There are still people making money in this area although I agree that the easy money is gone.

Traders: 4S.Everglades runs the strategies that 4S.Yellowstone tests?

Smith: Right. Some of our clients and prospects told us we were helping them figure out whether an idea worked or not, but were not helping them make any money off of it. So what if I know the idea works. Now how do I trade it?

Traders: O.K.

Smith: And when you get in and trade it, you encounter a host of other issues. I need to know the status of my orders. I need to be able to go out via FIX or through an API to a destination. I need to be able to run order-handling strategies. I want a strategy to get pairs done in some way. I want to get a basket done in some way. These are strategies where the content has been pre-determined either through Yellowstone or spreadsheets or MatLab or whatever. I know what I want to trade. Now help me work this trade.

Traders: In other words, how much to feed into the market at what time, etc?

Smith: When to feed it in. Can we feed it under these conditions? How to handle multiple instruments. How to deal with a legging condition. That's when one leg gets done and the other one doesn't. How complex do I want my business logic to be around that?

Traders: In industry parlance, is 4S.Everglades a "black box?"