Investment Philosophy

Why Invest in a Currency-based Hedge Fund?

Currency investing can offer important diversification benefits.  Historically, equity investors were able to achieve solid diversification through foreign markets.  Up through the mid-1980’s, the correlation coefficient between the U.S. and other developed markets as a whole was under .5, with it being even lower with Japan and approaching zero with many emerging markets.  The last twenty-five years, however, have seen returns among various equities converge, with correlation coefficients in developed markets increasing significantly.  Worse still, as witnessed in 2008-09, during market crashes, virtually every asset class goes down in lockstep; equity market returns across different nations converged, falling dramatically across the board.  What this meant was that precisely when investors needed a broadly diversified portfolio to act as such, it utterly failed to do so.  Currencies as an asset class have no inherent directional bias, and accordingly have no necessary correlation to either equity or bond returns. 

Currency investing has also presented consistent opportunities to exploit short- to medium-term deviations in fair value for long-term profit.  The currency market is the largest, most liquid asset market in the world.  Most of the participants are either entities seeking insurance from currency fluctuations (e.g., companies hedging currency exposure) or momentum traders.  Recent history shows numerous examples of currencies moving up or down dramatically, only to revert to previous valuation levels or beyond.  For instance the U.S. dollar soared from 1998 to 2001, only to collapse over the next seven years.  The Japanese yen fell dramatically from 2005 through the middle of 2007, appreciated to record highs through 2011, yet has most recently collapsed again.  

Investment Philosophy 

We believe that asset markets tend to be auto-reinforcing in the short-term, but mean-reverting in the long-term.  As momentum traders and hedgers push currency valuations to extremes, long-term investors stand to profit when currency prices revert to fair value.  For this reason, we employ a proprietary calculus that identifies intrinsic value ranges for currencies, seeking to identify when large valuation discrepancies arise, investing our fund's assets accordingly.