Dear Valor Investors,
As the subject says, this message is going out to all Valor investors, and as always will be posted to our blog as well. As most of you are aware, it was a very rough day of trading on Friday for Valor. The volatility increased steadily throughout the later part of this month, and last night’s news from the Bank of Japan shocked the world causing massive devaluation of the Yen. Daily FX sums it up pretty well here: http://www.dailyfx.com/forex/fundamental/daily_briefing/daily_pieces/top_fx_headlines/2014/10/31/BOJ-Jumps-the-Shark-as-JPY-Implodes-on-Surprise-Easing.html. This caused USDJPY to soar to a six-year high.
Valor’s stop losses as a result of this news release were triggered. You can see on the chart below where the trades closed (red circle), which although it was a huge hit, it was at the major resistance, and it could have been much worse if they gave it some room for a turn-around (which we are glad they didn’t do). Each bar in the chart represents one day of movement. (click the image below to see it all and to enlarge it)
This month has literally been an emotional roller-coaster with a lot of “back and forth” between us and the Valor Fx trade team.
We had some tense discussions with them coming into the month as they ended September in a deep drawdown but were insistent that the USDJPY would drop to around 106. Back on Oct. 1st, we were literally within 20 pips of manually intervening and closing out all their open trades.
The price did in fact reverse and actually came down to around 105 in mid-October as you can see in the chart picture. This was followed by a few “I told you so”, “you need to trust us” comments from the trade team as they were indeed correct and closed the basket of trades in profit.
When they continued to short USDJPY, we again questioned them but were reminded of what had just taken place.
Ultimately our mandate is to give the trade team defined risk parameters in which to operate and as long as they stay within those parameters, we try to defer to their judgement as the expert traders.
It was beyond frustrating to find ourselves back in the very same situation that we had just exited and obviously the end result was much different this time around.
This strategy has failed in more than one way; A.) It has breached its historical drawdown record since inception, and B.) It has had its 3rd losing month in a row.
A Change in Direction
This whole situation is causing us to rethink our inclusion of aggressive strategies into our portfolio basket. We originally added them for diversification and in response to strong demands from our clients but we can’t help but question whether it’s justified in the end.
Theoretically we can accept losses (even big ones) in the context of a bigger picture but the “destination” is meaningless if we can’t stomach the journey. Its one thing to look at an equity curve which displays a year’s worth of history in one blink of an eye, and it’s another thing to live through peaks and valleys.
This goes for us as well. We don’t like being at odds with the trade teams and we have had more than a couple sleepless nights over Valor in these past few months. It’s obvious that we need to make a change.
For those who insist on an “aggressive” option we are going to continue running Eagle ( keeping it at 1/3 – ½ risk ). He trades on an intra-day basis and he has no problem accepting his losses and looking for the next opportunity, all while delivering stellar results thus far.
We will also begin offering Stone Fund (our top-performing and most stable product to date) at 2.5x risk for those wishing to assume greater risk for a greater reward. Even at increased risk this will still be MUCH more conservative than the aggressive strategies we have used in the past. Here are the stats for Stone Fund at 1x risk
EURUSD only: http://www.myfxbook.com/members/ManagedFXHub/stone-fund-jul-2013-forward/818770
Multi-Pair: http://www.myfxbook.com/members/ManagedFXHub/stone-fund-march-1-2014/1027573
So with Stone Fund x 2.5 you can simply take the performance/drawdown stats from the links above and increase both by a multiple of 2.5. Based on those figures the maximum equity drawdown would have come in around 15%.
Valor FX will be replaced next week with one of our more stable trade teams which we will outline next week. We may also be making some changes to ArcFX.
Thankfully we have been increasing our R&D in recent months with a focus on assisting institutional clients with FX diversification, and even though the prospective returns may be lower, we are going to be giving greater consideration to the “journey” and not just the “destination”. We feel that smoothing out the ride will be much better in the long-term for both our clients as well as our team.
How are other traders handling the current market?
To give you an idea, our trade lab (where we test talented and promising traders) has gone from 28 very well performing traders at its peak in August, now down to 12 currently. In the span of just two months since the late summer / fall, when volatility picked up, over half of them have been completely dismantled by the change in market conditions, or they have breached their drawdown parameters and policies significantly, and have since been removed from our trade lab.
Here is an example of a popular trade team we had been monitoring (http://www.myfxbook.com/members/autotrade/hedge-king/938607) … this kind of story has been unfortunately quite common the past few months.
Certain traders/strategies performed really well in the prolonged range-bound markets and have suffered tremendously as pairs started breaking out to multi-year highs/lows.
Finding traders who have continued to perform well during the transition ( Stone Fund has been one of the best ) is a very valuable filter for our team. The market is separating the wheat from the chaff and despite experiencing some pain with Valor it’s actually helping us to identify and solidify valuable trader relationships going forward.
To add more fuel to our recent “fires” we have also been dealing with some frustrating broker issues but thankfully we have some big changes coming on that front as well, which will be extremely beneficial for all of our clients.
Outside of Valor, we have been pleased with the overall performance of our funds. Stone, Eagle (despite some volatile patches) and our Fortress Futures programs, have been holding their ground very well especially when we see the carnage that has occurred with many popular funds.
We appreciate your support and understanding during these past weeks, and certainly understand the frustrations with the Valor Fund. We want desperately to deliver value across ALL of our funds and when we experiences losses like this, we want you to know that we feel the sting right along with you. We hope that most ( if not all ) of you have heeded previous recommendations to diversify across other funds and that you weren’t exposed solely to Valor.
Looking at Stone Fund for example, it doesn’t post huge monthly returns but booked another 2.83% (multi-pair) and 5.57% (EURUSD only) stress free gain for the month of October.
We will be in touch early next week with a further update.
With Regards,
Managed Forex Hub
