02.04.2015

 

 

 

 

 

 

Investment Adviser:

FxPro Financial Services Limited

(April 2015)

Could you tell us a little bit about the Fund, how it works and what factors determine what forex investments the Fund makes?

The Fund trades predominantly on major currency pairs, with trades initiated and executed by over 50 different algorithmic trading strategies, which are optimally combined to maximise risk-adjusted performance. These automated strategies perform indicator tracking and quantitative modelling to initiate and closeout their trades, whilst also managing risk for their trades. In order to determine which strategies are best to be used and the optimal way for these strategies to be combined, portfolio optimisations are carried out based on modern portfolio theory, with portfolio rebalancing taking place at fixed time intervals. Although emphasis is on automated trading, all trades are closely monitored in order to add an extra layer of portfolio risk monitoring, particularly with regard to exposures around news events.

 

What makes the Fund different from any other form of forex investment?

 

Investors looking to tap into the FX market may do so in a number of ways. One option available is to trade on margin through one of the hundreds of FX brokers in the market. An advantage is that because of the use of leverage only a fraction of the actual trade value is needed as a deposit, though on the downside leverage is a double-edged sword, therefore the more leverage employed the higher the risk-taking.

An alternative investment option is to open a foreign currency bank account, gaining exposure by converting your funds. The drawback of this option, however, is that it can be quite costly depending on the bank’s spread, charges and commissions. Another option is to invest in an exchange traded product that tracks currencies. The benefit of this approach is that costs are more transparent but on the downside it is possible that the notes on offer cover a limited number of currencies or that the basket of currencies available do not match the investor’s objectives. Probably the best option, however, is to invest in an FX fund as costs are again transparent, and where, through active management, the aim is to maximise risk-adjusted returns.

 

The Fund uses sophisticated algorithms in deciding what currency trades to make and maximise gains. What advantage does this have over other forms of forex trading that do not use algorithms?

Nobel Prize winner Daniel Kahneman demonstrated in his pioneering work with Amos Tversky that human beings are far more likely to take on risk to avoid a loss rather than to secure a gain (Source: Prospect Theory: An Analysis of Decision Under Risk).

Behavioural economics has repeatedly demonstrated that human beings do not always act as rational, self-interested market participants, but are subject to cognitive and behavioural biases that cause them to behave in fundamentally irrational ways. This is why algorithms continue to gain ground in the world of trading. They behave in predictable ways, are not subject to human biases or emotions, do not fatigue and are both faster and more accurate than their human counterparts.