C8 Formally Launches Systematic FX Hedging Platform
Posted by Colin Lambert. Last updated: April 19, 2024
C8 Technologies, a fintech founded by former Blue Crest Capital Management partners Mattias Eriksson and Ebrahim Kasenally, has formally launched its FX hedging platform C8 Hedge, a service that employs systematic trading models to help corporate treasuries and investment firms manage their currency exposures.
The new platform is managed by Jonathan Webb, formerly head of FX strategy at Jefferies, who also worked in FX trading and portfolio management roles at institutions including HSBC, RBS, Bank of America, C-View and GLC.
Webb and Eriksson joined The Full FX’s publisher Colin Lambert to explain the service in this video interviewearlier this year, explaining how users are able to calculate optimal FX hedging ratios, add risk weights for each exposure and calculate optimal FX ratios for each currency within an overall portfolio limit. C8 Hedge does not change existing execution workflows and requires no integration work, thus ensuring customers retain full control of their FX hedging activities.
Kasenally says that initially the models were built to trade intra-day, or daily, but they were enhanced to allow the firm to develop longer-term models. “Trading on macro themes – economic data and events – took a lot of the noise in the market out of the process,” he explains. “This allowed us to hold positions for longer, meaning, for example, slippage becomes less of an issue because you are no longer battling for a pip in a never-ending technology arms race.”
Eriksson adds, “We talked with pension funds as well as with asset managers and owners, and they told us the problem with shorter term models was they brought a limitation on size with them and slippage is larger. These funds wanted to do larger size so we needed to think differently in how we approached markets.
“The world also became more driven by macro events, which itself favours slower traders with longer time horizons, seeking bigger moves,” he continues. “This has enabled us to develop different models, which we have packaged for clients.”
The key to C8 Hedge, according to Webb, is its simplicity. “We did a lot of research, including speaking to corporate treasuries and their message was clear, ‘make it simple to use with the flexibility we need’, and we think we have achieved that,” he observes. “There are still complexities, for example you have to take into account assets and liabilities when calculating hedges, you also need to understand many of these desks have an investment mandate, so we put a lot of work into ensuring the customers’ parameters and operating framework can be incorporated into the process. They can put their targets in and run the analysis based around their parameters.
“This is necessary complexity,” he adds, “But we believe we have made it as user friendly as it can be, so we do not upset the treasury’s existing workflow.”
Part of the research work was, as required by systematic models, back-testing. “We knew our system had the pedigree and the models worked, but we need to show that they can work in different environments and with different targets,” explains Kasenally. “We can also, if required, expose the underlying signals to help clients understand the different models. This is intended to build confidence through transparency.”
An occasional observation about dynamic hedging strategies is that they can lead to over-trading, but while Eriksson accepts a variable hedge model as offered by C8, can lead to more trading, he believes the results justify the increased activity. “Our results show that we deliver more alpha in spite of the higher rotation and the end result is better for the client,” he asserts. “If, however, clients are worried about rotation, they can set limits on how often they change position and how much of the variable hedge can be changed in one rotation.”
In addition to this, users are able to run their hedges over a longer time horizon. “Our research shows that one month is the optimal time horizon,” explains Webb. “Ultimately though, customers can trade less frequently, based upon their requirements, and the customised signals we provide.
“It is important to be forward looking, too many firms are reactive hedgers which doesn’t help,” he continues. “Being proactive means customers can take advantage of currency movements, rather than feeling forced to hedge after moves have occurred, which is not what many treasuries want to see.”
Ultimately, many corporate treasuries and asset management firms prefer to focus on their core competencies – whatever they may be for the particular firm – FX hedging is often an administrative process and as such is handled as simply and quickly as possible. This does mean, however, that the hedging process is rarely optimised, something C8 is seeking to change, without introducing onerous processes.
“Applying our systematic trading models to FX hedging through an intuitive platform that anyone can use allows corporates and funds avoid the complexities they would otherwise face when they buy an asset or sell products overseas” Eriksson concludes. “FX presents intricate risks that require a tailored approach, which is why we have designed the platform to allow users to easily craft customised FX hedging solutions that meet their exact requirements every time they need to handle foreign currency exposure.”