Like Barclays’ other currency indexes, the trend index offers a high Sharpe ratio and low-to-negative correlation both to other asset classes and to other forms of alpha in the forex market, said Andrew Kaufmann, global head of FX structuring at Barclays Capital in London.
The bank’s backtesting shows that in the period from January 2000 to August 2008, the trend index had a correlation of 5% to equities, –2% to fixed income and 7% to commodities. It also had a 26% correlation to the ICI and 2% to the AlphaVol strategy of the FX Volatility Indices.
The correlation was even lower over the past 12 months to fixed income (–14%) and the two forex strategies (11% for ICI and –27% for AlphaVol), although a little higher to equities (12%) and commodities (9%).
Historical performance of the trend index from January 2000 to August 2008 shows a total return of 7.5% a year, an excess return over the euro risk-free of 4.1% a year, volatility of 5.5% and a Sharpe ratio of 0.74.
Like most trend strategies, the index will be guided by moving averages. “The driving principle is that if a currency pair is trading above the moving average, we treat that as a buy signal for the trend strategy,” Kaufmann told Asia Risk. “If it is below the moving average, that’s a sell signal for the trend strategy.” The adaptive trend index then adapts that signal depending on volatility.
In terms of the likely customers for the new FX trend index, Kaufmann expects it to be attractive across the whole client base, from pension funds, insurers and corporates to retail distributors and private banks, as is the case with the ICI. “Some investors will be looking for delta-one exposure, some for principal protection,” he said. “It depends on their risk tolerance.”
As for the popular maturities for products referencing the index, he says most demand for the FX indexes comes from those looking for an investment horizon of three to five years, and he expects the trend index to be the same.
Trend strategies are one of the central sources of return in currency markets, says Barclays. But while forex trend strategies have been very popular with hedge funds and sophisticated investors, adds the bank, there remain very few liquid, transparent and easily investable indexes that incorporate these strategies.
The week on Risk.net, August 19-25, 2016Receive this by email