From the May 01, 2010 issue of Futures Magazine • Subscribe!

Forex fund management, student trader style

Back office issues
Traders were notorious for not managing the profit and loss of the model consistently and correctly. In fact, to produce the above graph, “Missed opportunity,” it was necessary to hand check the results of the student P/L output stored in the spreadsheet against the paper copy printed from the report. While all students loved the trading aspect of the simulation, few could barely tolerate what they termed ‘grunt work:’ maintaining the historical P/L records, producing daily and monthly P/L reports correctly, consistently and timely without prompting from the professor or teammates. This problem did not improve over the life of the fund.

Middle office issues
It was the intent of the professor to include the use of the value at risk (VaR) model in the Girth model. Several students were given the task of producing the VaR calculation for the trading model. These students were not as quantitatively adept as was expected, and the professor had to produce the model and instruct the students on the concept and use of the VaR model. It was a frustrating experience educationally, although it ultimately resulted in the full understanding of VaR within the trading model. However, no attempt was made at VaR implementation as full understanding of the VaR model occurred during the end of the fall semester. Again, it was a lapse of continuity. Spring students never got to the VaR understanding.

One of the biggest drawbacks to the management team was the initial lack of knowledge: what was the euro, what drove it, how the model worked, how to produce reports, how to actually report P/L, how to write market descriptions and how to drive a team of traders. The management team eventually learned that the buck stopped with them and drove themselves to produce results, some more timely than others. The fall semester team was much more effective in their methods than the spring semester team. The spring semester team actually was driven by three students from the fall team and they became the de facto management team. The hindrance of the spring team came in the initial knowledge transfer from the fall team, which was rocky. The professor spent much more time with the fall team than the spring team; she relied on the fall team to transfer the management knowledge base to the spring team and that transfer fell to three students. Further, the professor wanted to take a hands-off approach to the building of the fund; it was imperative that the students learned through experience. This approach probably produced more operational errors than necessary, but it broadened the knowledge base.

Surprisingly, the management team reports to the Futures magazine Web site for weekly updates was very sporadic. The students as a whole seemed to be unable to recognize the update as a valuable marketing tool. The students had similar issues with their blog; they simply could not seem to update it on the same day every week, and often missed a week.

Perhaps the biggest debacle of the total management of the Flyer Forex Fund was not trading the month of December against the recommendation of the professor (see “Missed opportunity,” above). The professor illustrated the high volatility trends of the euro of the past several years and indicated that, while the euro was range bound during November, historically it had significant December movement. The loudest cry for closing the fund over the holiday break came from a student who had already obtained a full time trading position after graduation.

The defibrillator
The biggest problem with moving toward real money funding in the Flyer Forex fund is a firm knowledge base and a truly committed core team. Therefore, the spring team will be producing a set of policies and procedures for the fall 2010 team. Only three students will roll into the fall team. The core spring team will then interview for students to form a less than 20-member team to manage the fund throughout the next academic year. While there will be a continued problem of teaching commodity trading, while starting the fund in the fall, it is hoped that the new team of students will practice on the FXCM trading platform over the summer and read ahead for the fall 2010 class. Thus, current students will interview for future students, knowledge will be passed, and a committed team should have increased accountability. The Girth model itself has been rewritten by a current student to simplify the model management issues, the error reporting issues and the introduction of VaR.

Like most endeavors, success in trading is often contingent on executing consistently the more mundane aspects of that endeavor not necessarily the sexier aspects. These are lessons every trader/manager must learn, preferably before placing his own or other people’s money on the line.

While it is true that the student driven model did not perform as well as the pure Girth model (real trading never does), the exercise was extremely valuable to discover operational and human fragilities in the system. Regarding professorial input, it is an exhausting process when coupled with other academic and service duties. However, the cost of the learning curve has been mostly paid for and it is worth the effort to move forward and take another stab at attempting a smooth transition toward real money management in this fund.

Leslie K. McNew is a clinical professor of finance and visiting director of the Hanley Group Derivatives Trading Center, Department of Economics and Finance at the University of Dayton Business School. E-mail her at

Charles B. Keller graduated with a bachelor’s degree in finance from the University of Dayton Business School in May 2010. E-mail him at

Kevin L. Woeste has an MBA concentration in finance and will graduate with a master’s degree in
financial mathematics from the University of Dayton Business School in May 2011. E-mail him at

John Rapp, Ph.D., is the chair and professor of economics at the Department of Economics and Finance at the University of Dayton Business School. E-mail him at

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