Currency Overlay Program (COP, COP+)
Investment Objective
With a currency overlay program, we manage your portfolio investing exclusively in currencies and precious metals.
Foreign exchange markets tend to be less volatile than stocks and offer strong diversification benefits.
An increasingly challenging part of managing money has to do with the decline in expected returns of both stocks and bonds.
Seeking investment alternatives to cover at least part of this growing expected "return shortfall" is becoming a pressing need for investors. We offer clients the use of a currency overlay program to meet this need through a tightly controlled risk budgeting process.
Before presenting our FX mandate solution, let's briefly review what FX and Precious metals can bring you as a separate asset class.
The Case For FX
Stocks and bonds produce income. FX markets may not offer a dividend or a coupon but they offer yield and return generation opportunities just like stocks and bonds.
Find out more here.
The Case For Gold
FX and precious metals investing are closely linked because gold and silver are the two original and time tested forms of money.
Arguments to integrate precious metals into your investment equation can be found here.
We offer investors an investable Currency Overlay Program solution targeting a risk level similar - in terms of VAR consumption - to a Swiss focus "balanced" portfolio (medium low level of risk).
An FX mandate can be managed either in overlay to an existing portfolio (as a way to seek additional return for this portfolio) or as a standalone portfolio.
COP FX mandate
Realized Volatility
Looking at the history of the COP model portfolio (derived from views expressed and published in the Bentin Daily since September 2014), the three-month historical volatility stood on average around 5% compared to the average standard deviation of 7% more commonly observed on a passive investment held in a diversified balanced portfolio over the same period.
COP FX mandate
Performance
Based on the implied views published daily since September 2014, the COP model portfolio unaudited performance was 4% over the first long year (March 2014-Dec 2015), 5.88% in 2016 with YTD 2017 performance at 4.81% (as per 24.May.2017).
The return on average exposure (or the total added value divided by the average yearly nominal exposure held during each year) was 9.8% over the first long year Sep2014-Dec15, 12% in 2016 and so far this year 7.94%.
Highlights of our FX calls since September 2014 are summarized here.
How Does an FX Mandate Work in Practice?
Option I: A Currency Overlay Portfolio
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Similarly to H. Ford who said that customers of the T model could have their car painted in any colour they wanted as long as it was black, we ought to manage all our FX overlay programs, small and large, the same way, targeting a specific maximum value-at-risk. Offering only one type of FX mandate risk level enables us to guarantee equal treatment, via an automatic and simple allocation of trades across our different FX mandates.
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You either own or open an account with one of our banking partners (at this stage BCV, Credit Suisse, Julius Baer, Swiss Quote, Interactive Brokers). We can help you with the process of opening the new account. Please note that we receive no retrocession of any sort associated with the management of your account from any of our trading counterparties. All that we have negotiated in certain cases are rebates on transaction costs that are 100% passed over to you as the beneficial owner of the account.
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We sign a portfolio management contract and you grant us a limited power of attorney authorizing us to manage your portfolio.
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You fund your account in cash or with a relatively safe security (or set of securities) serving as collateral to support the FX and precious positions held in your portfolio. This collateral is held in a master account unmanaged by us. We only manage a second sub account (supported by the master account in terms of credit) containing our FX and precious metals overlay positions. Holding two separate (master+sub) accounts enables a distinct performance calculation of the FX overlay program of the collateral. Alternatively, we could manage both the collateral and the overlay but in that case, the portfolio mandate would fall into another category, such as a Global Strategic mandate. In that case, there would be no subaccount, just one master account where all positions are held together and managed by us.
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We start managing your portfolio without leverage in relation to this currency overlay program size and often using no more than 70% of the total portfolio size as nominal FX exposure.
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While the collateral supporting the overlay program can be held in CHF, USD, EUR, GBP or CNH, the size of the overlay program and its performance will be measured in USD. The total return of the FX overlay at the end of every month equals the performance expressed in USD over the period divided by the Currency Overlay Program "size" expressed in USD as well.
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The minimum FX overlay program size is USD0.5mn. It will stay constant unless altered by the client (and will not change with the portfolio's performance).
Option II: A Standard Cash Funded Portfolio
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We start the FX mandate investing the available cash exclusively in FX and precious metals. In most cases, this will be an easier way to undertake FX positions, especially for non institutional clients.
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We run our FX portfolios as USD based portfolios (i.e. we start the portfolio with a cash amount in USD). However, a systematic currency hedge can be put in place that will hedge this initial pool of USD back into any alternative currency as you see fit. In other words, we can swap the initial pool of USD against any other G7 currency so that you will be immune to a dollar depreciation on your capital.
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There is no need to have both a master account and a sub account.
A COP+ Alternative
Bentinpartner's COP mandate runs without any leverage and displays a volatility about twice smaller than that of the S&P500 on average resulting in the potential for attractive risk/return characteristics. We also offer the possibility of a COP+ mandate which is run exactly the same way but with a leverage of 1 meaning that the risks and expected returns of COP+ are twice as large as those of COP. There is no need to deduct the cost of a margined loan to run a COP+ mandate because leverage in FX is readily available at no additional cost.
Targeted Audience
A COP or COP+ FX management mandate is ideal for both institutional and sophisticated private investors interested in tapping the diversification benefits of the FX asset class without having either the expertise or the time to manage a currency program by themselves.
The minimum portfolio size of COP and COP+ portfolio management mandates is CHF0.5mn.