Sticking to what works with currencies >>>
and bust cycle. As an example, the Korean won was a great carry trade for most of 2011 until September, when it promptly lost 14% of its value. Te main reason that this loss was so large was that all the carry investors tried to exit a typical high yielding currency in a very short period – who takes the other side of this exit trade? Most high yielding currencies just don’t have sufficient market depth, adding an unacceptable and unquantifiable risk to this investment thesis.
provide our basic IT infrastructure and two separate cloud providers and PrimeXM GmbH for our bridge and aggregation solutions.
What new strategies and products have you been exploring as part of efforts to widen your range of trading ideas and investment solutions?
We experiment all the time. Te recent trend has been to move to shorter-term time periods. Our current trades generally have duration of 4-8 hours. Te models that we plan on bringing on line operate in the two–to-thirty minute time horizon. We don’t feel that we currently have the interest to start trading in the sub-one minute time arena.
For those investors seeking currency returns from a managed account program, what advice would you give with respect to their choice of currency manager?
Te currency market has a turnover of over $4 trillion a day and it is a surprise, for a market that trades at many multiples of the total value of all daily global equity market volume, that there are so few dedicated currency managers.
Many currency managers fall into one of two categories: medium-term trend or carry traders. We do neither. Te reason that we do not invest in these strategies is that they are highly correlated not only to each other – but also to other asset classes. Carry strategies, buying a high yielding currency and borrowing in a low yielding currency, creates a positive interest rate spread. It is also easily leveraged. Te problem with this strategy is that it becomes easily crowded – and it feels like free money. Many investors deploy a degree of leverage in executing this strategy and so you end up with a boom
A medium term trend follower will end up with many of the same positions as the carry traders. Teir systems will identify the momentum of investors buying into the high yielding currency and they will follow them in and they will also try and exit when the trend turns, exacerbating the price movement. In essence both these strategies produce the same correlated return. Te other problem is that the same “risk-off” catalyst that caused the investor exit out of higher yielding currencies probably caused equity prices to fall – so you may end up with unwanted correlation to equity markets.
My advice is to seek diversification amongst managers of any asset class. In terms of managed accounts and managed account platforms, investors should closely examine what are the additional costs to host a managed account. Te main reason that investors have had an interest in managed accounts in recent years is their concerns about fund liquidity, transparency and the accurate marking of positions. Te currency markets are extremely liquid, as such currency funds should offer extremely good liquidity terms, and the marking of positions is not really subject to discretion, as example, the price of EUR/ USD is universally available. So the question remains, do the benefits of a managed account justify the extra fees over investing in the fund?
We operate a managed account on behalf of an institutional investor. It works well because we have good autonomy on how it operates, its trading infrastructure and with which counterparties it trades.
We have made sure that the Eleuthera Currency Fund is getting the best possible pricing. We have developed a superb multi-bank, multi-ECN executable pricing feed. Tis kind of set-up may not be available in some managed account platforms.
Ultimately, we are fiduciaries and our job is to help investors achieve their risk-adjusted return objectives. We are counterparty and investor friendly and we believe that true investment success is built through finding long-term sustainable partnership solutions between all stakeholders.
april 2012 e-FOREX | 191
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