Summary

Background Our methodology is based on two decades of experience in research and development in high-frequency finance. Olsen is famous for its historical database (compiled since 1985) of more than 200 million tick-by-tick currency market prices. Discipline Instead of following the trend, we invest against it. We have arrived at three contrarian beliefs that inform how we analyze the evolution of currency prices and how we invest: Market participants come in all shapes and sizes. From short-term speculators to institutional investors and market makers to central bankers, different players bring different expectations, investment time horizons, and dealing frequencies. To anticipate is to create an imbalance between buyers and sellers (discontinuities in liquidity and, therefore, pricing), the likely responses of these different players to price changes and other events must be analyzed discretely. When it comes to data inputs, you can only use what you see, and you can only see what you choose to look at. Conventional data analysis is too coarse-grained to reveal anything other than large-scale trends that are speculative and unreliable. Olsen uses signals that appear only in high-resolution analysis but whose effects are proven to determine prices. Every trade leaves a footprint; managing risk is about reading this path. High-frequency analysis reveals the undercurrents of transactions. Pricing flows originate in momentary micro-bursts of volatility that kill liquidity and displace pricing. The better you can gauge this displacement, the smarter your next position. More information on how our methodology challenges the conventional wisdom about asset pricing. What we do Olsen's trading models are embedded in a portfolio management system that allocates risk limits to each currency and manages overall exposure. The same trading models are used for all currencies, but each is "fractal," meaning it contains many sub-models with the same underlying structure but configured to accommodate a variety of investor profiles and anticipate their trading behavior. Price moves are analyzed in the context of the overall market trend, time of day, and market liquidity. Applying fractal models allows us to achieve a degree of diversification not available to other trading strategies. We analyze prices on a tick-by-tick basis. Our trading models identify the best entry, exit and change points. We compute liquidity by analyzing micro-volatility and spread in real time, and we budget the maximum changes of position to minimize the market impact of any of our trades. We follow a market-neutral strategy, so that long and short positions have equal likelihood of success. The size and limits for each portfolio are determined bottom-up: first we specify the maximum exposure per position; then we weigh the relative size of the position for any one currency; finally, each trading model has embedded limits for each position. We manage currency exposure by hedging positions that exceed pre-defined thresholds. By applying the same trading models to all currencies and systematically hedging the exposures that exceed pre-defined thresholds, we achieve diversification within the portfolio.