The Swiss Franc Isn’t All That Neutral by Attain Capital

While the East Coast was just waking up from a long nights slumber and the West Coast was still dreaming of Oscar nominations, the supposedly neutral Swiss detonated the biggest bomb the financial markets have seen in quite some time. A surprise attack of sorts as they decided to depeg the Swiss Franc from the Euro, which it has been attached to since September 2011, with little to no warning given. For any traders or managers out there with Swiss exposure, this is a morning they’ll remember for the rest of their careers…

The Swiss Franc spiked by almost 30% against the Euro, and around 25.40% against the US Dollar index in just hours, moving from under 1.00 to over 1.22 between 4 AM and 5 AM EST.

Here’s the Swiss Franc against the USD in 5 minute intervals.

Swiss Franc

(Disclaimer: Past performance is not necessarily indicative of future results)

Chart Courtesy: Finviz

And the weekly chart, showing today’s move on the far right encompassing all of the other prices for the past three and a half years!

Swiss Franc

(Disclaimer: Past performance is not necessarily indicative of future results)

Chart Courtesy: Finviz

If this doesn’t seem all that crazy to you, imagine it in Dow terms, where the move (in just an hour or so’s time) was the equivalent of the DJIA moving 4,300 points…(again, in an hour).


“The move (in just an hour or so’s time) was the equivalent of the DJIA moving 4,300 points”
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Talk about a flash crash. Per Mike Wilkins on Twitter:

Fun fact from Doug Ashburn in the @JohnLothian newsletter today: today’s move in CHF would be equivalent to a 4300 point move in the DJIA

— Mike Wilkins (@ilkandcookies) January 15, 2015

For some more perspective, consider the daily range of today’s move in the Swiss Franc futures. The range was about 24 full points (or 2400 ticks, or 2400 pips for you forex people) in the Swiss Franc futures. That range is equal to about $31,000 per single futures contract (to the positive if long, to the negative if short), and is more than the market moved collectively in the past 1000+ days.

Swiss Franc

The Swiss National Bank’s decision is only part of the equation for why the currency moved by this much. The other reason was likely heavy short covering, because so many in the market (including Trend followers) were short Swiss Franc, causing buying because so many stops were being hit and orders to cover shorts being initiated.

But the difference between playing your luck in the currency markets via forex trading, and a managed futures strategy systematically trading such a market – is that for the systematic managers, this type of blow up causing move is only a minor setback. Why? Well, because while many were short heading into the day, their target risk on entering the trade was likely somewhere between 0.25% and 1.50% of the portfolio.

So, if they are managing a $1,000,000 portfolio and risk 1% (or $10,000) on the Swiss Franc trade, they will look to exit the trade if and when it is losing more than $10,000. Of course, just because you put a protective level in, using stop orders and such, doesn’t mean it will be filled at that level. And todays’ move is a perfect example of that, with the market shooting higher without any real chance of getting out on the way up. Indeed, early reports from managers we monitor show they exited their trades 2 to 3 times worse than their risk models prescribed. So, in our example – the $10k loss became a $30k loss.

Covenant Capital, the manager of Attain’s Trend Fund, does a great job explaining why this “unprecedented move” sucks for long term trend followers, and is potentially catastrophic for short term traders:

“Today’s move in the Swiss Franc is a good example of an advantage of longer term trading. Nearly every trend follower suffered significant losses in the SF today. (By some measures versus relative volatility, the move in the SF today was the largest move in any market in the last thirty years. 1.77 times the size of the 1987 stock market crash.) A longer term trader might have had exits risking 600 points, so an 1800 point loss is three times anticipated loss. The SF loss today was the equivalent of taking losses in three different positions. That sucks. A shorter term trader might have had a position risking 40 points, so an 1800 point loss is 45 times anticipated. Today’s SF move was the equivalent of taking 45 consecutive losses. That’s bankruptcy.”

One silver lining is that many trend followers had significant profits built up in this position, having held short since mid-summer in many cases. (Past performance is Not Indicative of Future Results). Losing mostly ‘house money’ may lessen the sting some, but that also depends on your mental makeup; where many investors and manager may focus on the painful fact that the loss was many times the expected loss amount.

Of course, this also highlights some of the ways longer term systematic models are ‘anti-fragile‘, to use Nassim Taleb’s term. This was an epic, worst market move in 30 years, type move; and most systematic managers will be looking at a worst case scenario of 3% to 5% losses. That “sucks”, as Covenant says – but is not catastrophic. It’s recoverable. Also, this is just one of many markets in a systematic portfolio – meaning other trades in energies, grains, metals, and softs can help offset the crazy market’s losses and ensure that this sort of day doesn’t do real lasting damage.

PS – This isn’t the first time the Swiss Franc has done something like this, and someone got caught on the wrong side of trade. Back in 2011, Dighton Capital lost around -76% after everything was said and done, causing them to close up shop.

P.P.S. – Forex traders who were 100x leveraged short Swiss probably lost everything today, so you should buy them a drink, because this is their brain on Forex right now.