Issue No. 209
July 1996

Dynex Corporation
Contrarian currency trader
Publisher's note This article originally appeared in the July 1996 edition of MAR. Some minor changes have been made to reflect updated and corrected information. The article is in all respects identical to the original.
Reprinted by permission c 1966 by Managed Account Reports Inc. All rights reserved. Reproduction in any form forbidden without permission.
Trader Review

Contrarian currency trader
Dynex takes short-term-trend-following approach
By Beverley Chandler
Dynex Corp. is owned and run by its founder, Peter Panholzer. He has been a trading advisor since 1973 in a number of countries and continents, having previously been an architect. His first trading experience came trading silver in 1973 while living in Toronto. He is Austrian by birth hailing from Vienna.

In 1979, Panholzer started the Magnum program with ContiCommodity - a subsidiary of Continental Grain - which, he believes, may have been the first pure currencies-only program traded with more than 200 clients. In order to be able to market the Magnum program worldwide, ContiCommodity suggested that he return to Europe, so Panholzer decided to join the firm's office in Lugano, Switzerland.

Panholzer traded there from 1981 to 1984. That final year was a difficult one for his trading and despite achieving triple-digit returns in the previous three years - the Magnum program eventually experienced a serious setback. This, combined with the sale of ContiCommodity to Refco, dispersed most Magnum clients who had joined from ContiCommodity's worldwide offices.

Refco decided to close its Lugano and Geneva offices, and Panholzer decided to move to London and join E.F. Hutton, where he worked with Robert Scheiner at the firm's Curzon Street office. Here, Panholzer got his first experience trading spot foreign exchange but finally felt that better earning potential lay in a move back to Refco. Panholzer joined Refco under managing director Richard Reinert.

Going Solo
Panholzer set up Panholzer Advisory Corp. in 1988 and Dynex Corporation in 1990 and moved to Monte Carlo from London in 1992, having fallen for that city's charms while on vacation. Dynex is the investment advisor company to Panholzer's accounts and to his new fund, the Pan-Forex fund, which started trading June 1 (see Update on page 3). Panholzer Advisory Corp. is the entity for US investors, though none exist at this time.

Initially, Panholzer's clients came through banks and other funds - particularly Japanese funds. Panholzer is a contrarian trader, trading over a short time horizon of one or two days. "I am proud not to be a conventional trend follower," he says. He believes that while markets trend at their outset, in time they become more and more random. In 1988, he wrote that the tendency of currencies to trend was deteriorating along an irreversible, declining path. At that time, he estimated that an annual reduction of 4% in market exposure would be the proper remedy to this telltale warning signal.

In retrospect, he feels that this counter-measure was too tame. "Randomness (as opposed to trending) in currency markets increased dramatically rather than gradually through 1993 and 1994, causing very bad performance among conventional currency trend followers during those two years," he says.

Contrarian trading strategies try to detect when buying or selling power has exhausted itself. "They prove to be most effective when public opinion about market direction has become overwhelmingly one-sided," Panholzer says.

In terms of markets that he trades, Panholzer uses all the major currencies against the dollar. However, his major profits have been in US dollar/Deutsche mark and US dollar/Japanese yen. He believes that this is because they are the most liquid markets and that as a result, execution is better.

His figures show a one-year average annual compound return of 20.2% with a maximum decline of 12.4%. Panholzer's Sharpe ratio stands at an excellent 1.0.

Execution enhances performance
Execution, Panholzer claims, can be responsible for a quarter and even up to half of the performance he achieves. The bid/ask spread on foreign exchange trades offered by the banks varies from 3 to 5 pips depending on whom he uses.

However, Panholzer has completely given up trading futures and won't look at the currency futures markets because he finds these markets not accessible over 24 hours and the commission structure too onerous. "Trading currency futures through the International Monetary Market, with its fees and brokerage commission, makes them too costly for frequent trading," says Panholzer. "If the IMM duplicated the FX market, offering three pip-wide bid and ask spreads without exchange fees and tacked-on commission, I would trade it with a standardized contract date and size," he says. He feels that while the foreign exchange market has evolved, the IMM has not achieved that process yet.

Panholzer's risk-control measures include stopping trading if he loses more thant 5%. "If you lose more than 5%, then cut out and leave the month alone, " he says. He employs leverage at an average ratio of two and a half, although he can go up to five times by agreement with the client.

Currently, clients include four banks, one fund and several investment corporations. They each require a different trading desk and one of Panholzer's aims for the near future is to have all his new customers use the Pan-Forex fund. "If you look at Monroe Trout, you will find that he had just one fund from the beginning - I believe this to be ideal," he says. If he wishes to trade at the moment, he has to call five different banks. "I need a telephone operator," he jokes. "I have had to turn business away because I cannot have more trading desks." He currently uses UBS, Citibank, Refco F/X, Credit Agricole and a Scandinavian bank.

Paperless office
Panholzer claims to run a truly paperless office and has a marketing office in Paris as well as a permanent backup computer in London. The computers are all linked by the Intranet, a new invention that allows computers to link up using Internet technology but offering total security.

Panholzer believes that he can offer medium-sized investment banks the opportunity to "farm out" some of the proprietary trading in which they have to engage. As a contrarian trader, he believes that methodology offers excellent diversification to more traditional trading systems. "I believe that our approach is unique," he says, "And correlates little with other trading approaches.". [[an error occurred while processing this directive]]