Alts Democratized: A Practical Guide to Alternative Mutual Funds and ETFs for Financial Advisors, + Website

Chapter 6Alternative Currency Strategies Funds

Synopsis

Alternative Currency Strategies Funds offer more beta and less alpha than most Lipper alternative classifications, since the risks and returns rely almost entirely on exchange rates. The management styles vary, and most of these funds have a track record of low returns and high volatility. These funds are mainly used for tactical hedging and targeted bets, so most of the value added for clients reflects decisions made by the advisor.

Definition

Funds that invest in global currencies through the use of short-term money market instruments, derivatives (forwards, options, swaps), and cash deposits.

Definition of the Lipper classification: Alternative Currency Strategies Funds

As indicated in the Lipper definition, Alternative Currency Strategies Funds invest in global currencies, using money market vehicles or derivatives with short durations. Some products also use short-term sovereign debt to achieve the desired currency exposure. Most of these funds enable advisors and investors to bet against the U.S. dollar, though some offer leveraged exposure that represents a bullish bet on the U.S. dollar.

In 2004 a large drop in the U.S. dollar helped propel the returns of this classification, since these products offered investors the ability to hedge with foreign currencies. These funds provide naked beta, enabling directional bets based on the discretion of the advisor or investor. As such, these funds are not strategic diversifiers. ...