Currency Overlay Program Mandate (COP+)
Seeking Alpha With FX
As investors, we face the collective challenge of a structural decline in expected returns from traditional asset classes.
A COP+ mandate offers the opportunity to tap the diversifying and yield enhancing benefits of an alternative asset class (FX and precious metals) which coupled to a new source of alpha can help achieving attractive risk adjusted returns, independently from the direction of equity markets.
How Does it Work ?
Starting with a portfolio invested in whatever asset allocation has been chosen by the investor (a pool of cash, a combination of stocks and bonds or gold), we preserve the core investments and the flow of coupons and dividends of the portfolio, only focussing on managing and adding value with an FX overlay.
We use FX spot and forward transactions, currency futures and options to establish the portfolio's currency exposure.
We do so applying strict risk budgeting guidelines and no leverage as we typically won't have more than a 50%-60% allocation in currencies other than the portfolio's base currency.
The performance of the portfolio's asset allocation (resulting from the client's investment choices) is calculated separately from the performance of the currency overlay exposure (our decisions).
Liquidity is a key consideration. We do not invest in structured notes and the currency overlay can be unwound within 2 business days and our mandate terminated with a three day's notice as well.
To meet minimum diversification requirements, a COP+ portfolio management mandate starts with a minimum investment of USD 0.5mn and will be held with either Swissquote or Interactive Brokers, our two prime brokers and custodians. For mandates over USD5mn, alternative custodians are possible.
What To Expect?
Based on the history of our FX COP+ Model Portfolio documented in our daily newsletter and distributed since September 2014, the range of annual returns achieved with our FX overlay program stood between -0.86% and +10.48% with an average annual return of +5.86% (coming on top of the portfolio's asset allocation). Because we do not use leverage, the rolling 3-month annualized standard deviation of the overlay program ranges between 5% and 8% only.
Before starting to manage a currency overlay program we ensure that our clients understand the characteristics and risks of this asset class.
We separately measure the risks and performance of the underlying portfolio (the client's choice) and of the currency overlay (our decision).
At the end of the year, the total return of your portfolio will be the combined performance of your portfolio (dividends, coupons and capital appreciation) and of our currency overlay program.
Investors such as foundations or pensions funds interested in keeping their portfolio structure intact but with the additional expected return of a currency overlay program tapping our multi decade experience managing FX risks at the BIS and other top private institutions.
For more information on our COP+ FX model, contact us or take a free trial to our Newsletter.