New York (HedgeCo.net) – Swiss banking group SYZ & CO has launched the OYSTER ForExtra Yield EUR, a new sub-fund of its OYSTER Funds SICAV. There are five currencies selected for trade, the Brazilian real, the Indian rupee, the Polish zloty, the South African rand and the Turkish lira.
The sub-fund seeks to take advantage of the high interest rates paid by certain currencies. This innovative strategy has been tested successfully for two years before being made available today in the form of a UCITS III fund.
Hedge funds which bet on an appreciation or depreciation of currencies usually use considerable leverage and their results are highly volatile. Furthermore the products that seek to take advantage of the “carry trade” (interest-rate differential between two currencies) are also characterized by substantial leverage and therefore involve a significant downside risk.
The strategy developed for OYSTER ForExtra Yield by Fabrizio Quirighetti, chief economist of Banque SYZ & CO, and Akimou Ossé, head of risk management for the Group, enables investors to avoid these stumbling blocks, while benefiting from the high yields and structural progress of the emerging currencies. It consists of buying the selected currency through a forward contract then reselling it at the spot rate at maturity, a technique that allows the interest-rate differential with the fund’s reference currency (EUR) to be captured while limiting the counterparty risk.
The investment universe comprises all the currencies of the MSCI World and MSCI Emerging Markets indices, with the exception of some illiquid markets. In order to focus on the most worthwhile currencies, each month the managers select the five currencies having the best risk/return ratio, measured by the interest-rate differential with the euro, divided by the expected volatility.
The fund’s assets are then invested with an equal weighting in these five currencies, via one-month forward foreign-exchange contracts or non-deliverable forwards (NDFs) for the currencies that are non-convertible or subject to restricted convertibility. The cash is invested in short-term deposits in the reference currency.
The result is a diversified portfolio that benefits from the UCITS III regulatory framework, is only weakly correlated with traditional asset classes, and is rebalanced systematically every month by means of a simple and transparent process without any leverage.
Prior to being implemented in this new sub-fund of the Luxembourg OYSTER Sicav, this strategy was first successfully tested for two years in a structured product issued by JP Morgan Structured Products BV, and managed identically.
Alex Akesson
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