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Ferdinand's Legacy - The Alpine adventures of Pecora Capital

Published in Automated Trader Magazine Issue 33 Q2 2014

In the 1930s, an Italian immigrant-made-good named Ferdinand Pecora went up against some very powerful financial institutions. Having battled against the odds to obtain a law degree, he eventually became counsel to a US Senate committee, where he took on the most famous bankers of the day -- and came out on top. More than 80 years later, Aaron Smith was so inspired by the manís rags-to-reform story he named his fund Pecora Capital. From his Zurich office, he tells Adam Cox how he aims to emulate the firmís namesake using systematic trading techniques to duke it out against the big players in the FX market.

Adam: Let's start with the origins of Pecora.

Aaron: Ferdinand Pecora was a Sicilian immigrant to New York over a century ago, who against incredible odds, actually went on to get a law degree at a time when Italian-Americans just weren't able to get into law school. He was an American Dream/pick-yourself-up-by-the-bootstraps type of person who went on to make a very meaningful impact on the financial world. After the market crash of 1929, he went up against Charles Mitchell of National City Bank (now Citibank), the JP Morgan dynasty, and a number of other very powerful banking interests which had profited from the collapse. He went up against the most powerful men in the world on the basis of his integrity and what was right.

In the wake of this activity, he laid the basis for the Securities Act of 1933, the Investment Company Act of 1940, and all of the most important laws and regulations that are still governing the financial markets today. He then became one of the first commissioners at the SEC. So a relatively obscure person in terms of financial history but someone who actually had a pretty big impact. We find that to be a source of inspiration.

Adam: It sounds like you see yourselves almost in a kind of David-and-Goliath scenario here. Or is that stretching it?

Aaron: King David is one of my greatest heroes. Mighty Goliath taunted the Israelite army for 40 days before little David, the youngest of his brothers, courageously won the battle singlehandedly. Despite the odds, David was successful because of his faith and, subsequently, became the greatest king in the history of Israel. Therefore, faith is the basis of everything I do, both personally and professionally. When it comes to trading, the analogy is apt because the FX space is dominated by the status quo, the large banks. At Pecora, the idea of independence and integrity in our research is paramount. We strive to build an environment of autonomous idea generation without respect to quarterly earnings estimate pressures or any other constraints. We want to go where the data leads us. And we want to be objective in building the best trading technology possible, without any hubris, without any politics and with a clear sense of independence that enables us to allocate our capital to high quality trading systems. We won't fall in love with our own ideas -- the best managers adapt proactively over time.

Adam: That leads me to straight into the analytical approach you take. What are some of your current ideas and how do you arrive at them?

Aaron: First of all, we're very focused on the development of short-term trading systems in the FX space and in liquid futures markets. We're not high-frequency. We're not medium to long-term. We want to focus on the sweet spot. In the high-frequency space, I think you're in a technological footrace. In the medium to long-term space, you're really at the whim of the general market and you generally show higher volatility and drawdowns, which are untenable, at least from the risk appetite of most investors today. For us, the sweet spot is short-term trading systems. We don't subscribe to any Holy Grail theory. We just focus on looking at different types of trading strategies and blending them together so that we generate the highest Sharpe ratio possible. Our core trading strategy dates back to 2008. This trading strategy, I would call it a momentum strategy, is essentially trading breakouts on a technical basis. This is, I would say, our trend component, which is one module or basket of correlation.

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