The liquidity found in foreign exchange markets allows for more trading opportunities than many other markets, which is why Conor O’Mara, investment director at Three Rock Capital, has more than 50% of exposure in forex.
The Dublin, Ireland-based firm’s diversified discretionary global macro program is relatively conservative with an M/E ratio around 6.5%. It has produced positive returns in six of the seven years since its inception in January 2009 and is up 11.59% year-to-date through July.
To stay successful, O’Mara—a former bank forex trader for several years—says he focuses on the risk/reward ratio of any trade. “We look at the potential; there has to be an attractive ratio between the potential gain vs. the potential loss,” O’Mara says.
It all goes back to the risk-management strategy. “We need to [earn] more on a winning trade versus [what we lose on a] losing trade. That is how we stay in the game,” he says.
While Three Rock trades equity indexes, interest rates and precious metals, it focuses on forex. “We are very protective of performance, especially during volatile times. We are not diversified because diversification makes it a lot harder to adapt to volatility. We focus risk at any point on a very few trades at a time — no more than five at a time. This allows us to be nimble. That also makes us very different than other momentum, short-term traders — we use much shorter periods than other short-term traders,” O’Mara says.
It has been an especially positive time for the firm, particularly from Q4 2014 through Q1 2015. O’Mara says this is because the forex market currently is experiencing a dollar bull market, and the firm has been shorting the euro, pound and the Canadian dollar against the U.S. dollar, which has led to profits. In fact, most of the currencies the firm trades are G10 currencies against the U.S. dollar.
“We believe a new era has begun in the forex markets, an era of U.S. dollar strength,” O’Mara says.
“We expect the dollar bull market to provide a productive backdrop for trading in foreign exchange markets in 2015 and beyond. Three Rock Capital is well placed to take advantage of this backdrop, having returned 32% for investors in the last year, including 25% from foreign exchange markets.”
In addition, a China-driven bear market in commodities has lowered commodity prices and the currencies of commodity-exporting currencies, moves generally welcomed by the relevant central banks, according to O’Mara. More recently, the devaluation of the Chinese yuan has led to broad-based weakness in emerging market currencies against the U.S. dollar, further contributing to the firm’s successful trading.
Looking at other international issues, their trading strategy guards against major losses. For example, the day the Swiss unpegged the franc from the euro, they were short with working stops in place. Their stop was hit and he says it wasn’t a big deal for the firm, taking a 0.31% loss.
Three Rock uses technicals along with fundamental analysis. Price charts are essential to what they do. With financial markets, there’s always a state of uncertainty.
“For us, price charts represent a picture of what the collective is doing; it gives us a feel for the markets. They help us identify important levels regarding supply and demand,” he says. “We are momentum focused, not contrarians — we go with the collective, so price charts help provide evidence that we are thinking the right way.”
O’Mara attributes the recent success to the fact that the forex markets are no longer in the risk on/risk off environment that existed in 2013. “The environment has normalized as the correlations with the forex market and the S&P 500 have come down — the correlations used to be high but now they’re lower,” he says.
One might recall that Ireland at one time was one of the PIIGS (five Eurozone nations [Portugal, Ireland, Italy, Greece and Spain] considered weaker economically following the financial crisis). One would wonder if there is risk to the Eurozone of an economic downturn.
O’Mara says, “The European Central Bank [recently] re-affirmed its intention to counter euro strength and European stock market weakness. We think they ultimately will succeed, that stocks will recover from the recent sell-off and that the currency will renew its weakening trend.”