Currency Hedge Funds: Structure, Regulation and Management

Currency Hedge Funds

are similar to other hedge funds in the way they are structured, regulated and managed.

Currency Hedge Funds

Currency Hedge Funds vs Multi-Asset Class Funds

However, they are different from other hedge funds in the way that they are used by investors to add yield to their portfolios. Currency hedge funds, like most hedge funds, are structured as limited liability corporations; and registered as either on or offshore entities. Most foreign FX hedge funds are domiciled, registered, and regulated in the British Virgin Islands or the Cayman Islands. Onshore FX hedge funds formed and regulated in jurisdictions such as the United States or Great Britain. Regardless of where they are created and controlled, the managers of currency hedge funds can deploy the same management styles as mixed portfolio funds to maximize return on investment for their investors. Management styles vary but include discretionary, technical and quantitative techniques. These Forex hedge funds are also the favorite  stomping grounds of  emerging managers.  The advantage of currency hedge funds is that the returns on these funds are orthogonal to the output of multi-asset class hedge funds, which are usually heavily laden with equities and other highly correlated asset classes. The returns of currency funds are not related to each other, nor are they related to the yields of multi-asset class hedge funds.Investors will use currency hedge funds to offset the correlation risk in their hedge fund portfolios. However, it is important for investors to find managers who can create positive returns in the currency markets. Even though currency hedge funds do not have the customization and leverage advantages of Forex managed accounts, they are a powerful tool for professional investors to have in their arsenal of weapons when fighting the evils of today’s highly correlated markets. Also, unlike Forex managed accounts, currency hedge funds are only open to professional investors and are not sold to retail investors as a regular practice.

Forex Managed Account Profit Factor Calcuation

Forex Managed Account Profit Factor Calculation

Forex Profit Calculation

Forex Profit Factor Calculation

The profit factor, as measured in a Managed Account, is a calculation that shows how many times the average profit is greater than the average loss.  The profit factor is represented by a ration.  If the ration is positive, the fund should be making money.  The larger the ratio, the better the fund is performing.  For example, a  managed account program whose profit calculation is 2.0 is performing better than a fund whose ratio is 1.0.  See the profit factor calculation for Atlast Forex by clicking on the following link. A profit factor calculation that is above 1.0 is considered very good for FX funds that have long term track records.

Forex Hedge Fund

Forex hedge fund currencies A Forex hedge fund is a corporation expressly purposed as an investment vehicle. High net worth entities, including companies and individuals, commingle their funds in the hedge fund vehicle to make specific investments.

Forex driven hedge funds typically use short-term strategies to buy and sell currency pairs and attempt to make a profit. Almost all Forex hedge funds use leverage to maximize returns.

Hedge funds are not as liquid as managed accounts, or self-directed accounts, and investors cannot liquidate their shares in the corporation on-demand. Typically, Forex hedge funds require that investors keep their money in the vehicle for at least 12 months.

Forex Volatility

Forex Charting, FX Volatility

Forex Volatility

Forex and volatility go hand-in-hand.  Forex volatility  is determined by the  movement of a Forex rate over a period of time.

Forex volatility, or real volatility,  is often measured as a regular or normalized standard deviation, and the term historical volatility refers to the price variations actually observed in the past, while  implied volatility refers to the volatility that the Forex market expects in the future as an implied by the price of the Forex options.   Implied Forex volatility is an actively traded options market determine by  the expectations of Forex  traders as to what real Forex volatility will be in the future.  Market volatility is a key component of a Forex traders evaluation of a potential trade.  If the market to too volatile, the trader might determine that the risk is to great to enter the market.  If market volatility is too low, the trader might determine that there is not enough opportunity to make money so he would choose not to deploy his capital.  Volatility is a one of the most important factors that a trader considers when he is deciding on when, and how, to deploy his capital.  If a market his highly volatile, a trader might decide to deploy less capital then if the market was less volatile.  On the other hand, if volatility is low, a trader might decide to deploy more capital because lower volatility markets might offer less risk.

Forex Risk Management

Forex Chart

Forex Risk Management

Forex risk management is the process of identifying and taking action in the areas of vulnerability and strength in a  Forex portfolio, trading or other managed Forex account.

In Forex options, risk management often involves the assessment of risk parameters known as Delta, Gamma, Vega, Rho and Phi,  as well as determining the overall expected return per Forex trade in the monetary loss to traders willing to forgo if the trade goes bad. Having good risk management can often make the difference between success and failure especially when dealing in the Forex  markets.

Forex Funds And The Standard Deviation Measurement

The most common measurements used by professional investors when they are comparing Forex funds track records is standard deviation.Forex background

Standard deviation, in this case, is the level of volatility of returns measured in percentage terms over a period of many months or even years. The standard deviation of returns is a measurement that compares the variability of returns between funds when combined with data from annual returns.  The track record with the lower standard deviation would be the more desirable program to invest in.

Hedge Fund Definition

A hedge fund ishedge fund manager checking the Forex markets an aggressively managed collection of investments that uses sophisticated investment methods such as geared, long, short and derivative positions in the domestic and global marketplaces with the objective of producing high returns (either in a total sense or more than a particular sector benchmark).

A hedge fund is usually established as private investment partnerships that are open to a restricted amount of investors and mandate a large primary minimum investment. Opportunities within hedge funds can be illiquid because they frequently demand investors maintain their capital in the fund for a minimum of twelve months.

Defining An Alternative Investment

man looking at alternative investmentsDefining an alternative investment : an investment that is not among the three traditional types: equities, bonds or mutual funds is considered and alternative investments.

Most alternative investment assets are held by institutional traders or accredited, high-net-worth people due to their complex nature of the investment. Alternative opportunities include hedge funds, Forex managed accounts, property, and exchange traded future contracts. Alternative investments aren’t correlated with the world stock markets which makes them highly sought after by investors seeking returns uncorrelated to traditional investments. Alternative opportunities are preferred due to the fact their returns possess a low correlation the worlds major markets. Due to this, many sophisticated investors, such as banks and endowments, have started to allocate a part of their investment portfolios to alternative investment opportunities. While small investor might have not had the opportunity to invest in alternative investments in the past, they can know invest in individually managed Forex accounts.