Mark Coe started out his trading career as a successful discretionary trader for proprietary trading firm Blackwood Securities in 1999. As his trading evolved he focused on foreign exchange and system development. After leaving Blackwood, in 2002 Coe and a partner formed Tiburon Capital, which focused on short-term forex trading.
At Tiburon, which would eventually evolve into Coe Capital in 2004, Coe profitably managed his own account and those of friends and family. He was not through evolving though and despite relative success in his short-term trend following system, Coe added a carry trade element to his system, which led him to become more systematic and longer-term. “It evolved into multiple systems looking at different reasoning, different logic, different time frames. The basis has always been trying to find something that can produce superior risk adjusted returns while [controlling] drawdowns, that has always been the goal,” Coe says.
While Coe’s system benefits from positive carry, profits are not derived exclusively through carry. He says his signals are good enough to stand on their own and the carry element simply adds value. “The model works regardless of whether you are trading a currency that is paying you interest or if you are paying interest; you just have a much bigger cushion, you have that added bonus by receiving that interest,” Coe says.
When he included the carry model in 2005, only currency pairs with a positive carry were executed but that has changed as well. “We do put on trades that don’t have a positive carry if the set-up is correct; it has been an evolution.”
His model has become more systematic and can be run on any currency pair. “We like to focus the risk on the ones [where] we are receiving interest. It doesn’t matter so much when you are looking at one- or two-week trades, if they are a longer-term trade we want to be getting the interest.”
As he developed the carry model he lengthened his time frame. “For a short-term guy the carry element wouldn’t do a whole lot for you. We have to have these trades on for a long time for the interest to really do anything. If it is on for a day or a week it is not doing a lot. It is a progression once you are in the trade. I may be long the British pound against the Swiss franc [and] have exposure to that currency pair over several weeks at a time and that is where you will see the element of carry really do something.”
While each buy signal needs to stand on its own and benefits from a trend, range bound currencies allow the carry element to profit. “The evolution occurred by looking at average annual ranges — the amount of carry you would receive throughout the course of the year if say GBP/JPY traded in a range,” Coe says. He could hold a positive carry position in a range bound pair and receive the cost of the carry with very little risk.
The carry gives you a cushion. “It absolutely is a cushion. Say you have a $1 million account and you buy $1 million GBP/JPY and you are going to receive 7% a year. That is 7% that is either added to your gains or is a buffer against what you could lose. It is like buying Wal-Mart stock and receiving a dividend but a piece of that dividend is being paid every single night. You could buy Wal-Mart at $50 and know that it could end the year at $43 and you break even.”
Coe posted a 17% return in July by benefiting from both strong trends and positive carry. He had positions in the British pound against the Japanese yen and the Swiss franc as well as the USD/MXN (Mexican peso).
The typical carry trader will trade more exotics but Coe keeps his trades to more common currencies, making money on the trend with the carry element being an added bonus. “The Turkish lira pays 16% or 17% overnight interest rates, so there is tremendous positive carry holding Turkish Lira but then again you are holding Turkish Lira,” Coe adds.
While his CTA has a short track record — a 55% total return since October 2005 — Coe himself has seen long-term success and has shown the ability to improve and evolve his systems.
