Jes Black began his career on Wall Street in 2000 as a currency strategist at MG Financial Group. He is now managing director of Black Flag Capital, an alternative asset management company, and the co-founder of NetBlack Capital with John Netto.
NetBlack Capital focuses on buying undervalued currency pairs with positive rate differentials, or carry trades. “We started with a foreign exchange global macro fund strategy very much involved in currency trades. The strategy from the inception of the fund [in 2005] was that we would look to buy commodity currencies,” Black says.
“We wanted currencies that would be underpinned by strong cash flow growth. We take that and couple it with the philosophy that we want to maximize return relative to every unit of risk that we take. We’ve been able to get creative by looking for currency pairs or assets that are highly correlated and look[ing] for moments to buy one and sell the other.”
This strategy has been very successful, ranked third among similar currency strategies over the past three years by Barclay Hedge. While Black has operated accounts under several different structures, the underlying strategy has not changed since its inception in January 2005 and has earned a compound annual return of 13.98% since January 2005, with a worst drawdown of 4.62%, a Sharpe ratio of 1.66 and an upside over downside standard deviation of nearly 4 to 1.
“The longevity of our strategy is proving itself, especially this year as we exited all of the carry trades in July and went short a lot of those pairs. We’re not blind to just capturing yields – we like to do it, but we have an innovative approach,” he says.
Black says that NetBlack stands out from other firms because it is able to participate on the upside while limiting much of its downside risk. “The thing that differentiates us from everybody else is that we do not leverage the strategy,” Black says, adding that sound economic fundamentals must always underpin the firm’s purchase of high-yielding currency pairs. “It’s very similar to evaluating currency as an asset class. This comprises the base of our portfolio and [then] we manage the risk around that base portfolio. By managing the risk, we actually hedge out our exposure. We probably hedge out about 75% of our exposure, meaning we devise ways to capture that interest rate carry and participate on the upside while mitigating the downside risk.”
Black says that the firm uses the Hippocratic Oath, “first do no harm,” as a motto for its clients. “As long as we don’t lose money, we’re always in the game in order to make money and that is the risk profile on our returns. We have very few losing months and we’re practically positive on 90% of our months of trading. The few months that we have lost money our maximum drawdown is 2% on a month and our maximum consecutive drawdown is 5% over any given period, meaning that we will completely get out of the market if we’re down either 2% over a month or 5% over any consecutive period.”
Black also believes in constantly seeking out new trading opportunities. “The market doesn’t just give you these opportunities and stay put,” he says. “You always have to be seeking out these strategies.”
