ABN AMRO launches new currency hedge fund and structured note

The currency hedge fund is aimed at institutions, funds of hedge funds and family offices, and the structured note is intended for private investors and HNW and discretionary managers.

Both products are managed by AAAM’s successful currency team, led by Pierre Lequeux, and both draw on the company’s quantitative investment process, available normally only to large institutions – allowing investors to diversify away from other alternative asset classes, property and cash included.
Investing in a currency investment product can lower overall risk, and although investment in currency can be risky per se, the asset class is driven by completely different fundamentals to equity and debt markets.  Currency has a minimal correlation with traditional asset classes.

The returns which may be available from investing in currency are illustrated by the ABN AMRO FX Notes 1 and 2. The annualised return of the ABN AMRO FX Note 1 from inception in September 2002 until the end of April 2004 is 15.2% p.a. (US Dollar class) with a volatility of 10% p.a., a correlation to the S&P 500 of 0.05 and a Sharpe Ratio of 1.4.

The currency hedge fund is open-ended and will invest with the objective of providing annual returns in the region of 12-15%, with a volatility target of 15%.

It will trade between currency pairs in the most liquid and closely correlated currencies, notably USD, EUR, JPY, GBP, CHF, CAD, AUD, NZD, SEK and NOK. Assets not employed in the currency investment strategy will be invested in money market instruments, with a minimum credit rating of A1/P1, or in money market funds, including AAAM’s global liquidity funds.

The note is a ten-year product that follows the ABN AMRO FX Notes 1 and 2.  It aims to provide average net returns in the region of 9%-11% per annum, whilst keeping volatility at approximately 12%. The note is closed-ended, and investors have until 11 June 2004 to invest.

The currency investment model was designed by Pierre Lequeux, Head of Currency Management AAAM, and is based on quantitative analysis, with judgment calls when scaling and allocating positions. The quantitative process analyses the three main drivers of the foreign exchange market, (namely trends in prices, interest rate differential and yield curve) and then generates trading signals.

Lequeux said: “Until now, investing in currency strategies has been the preserve of larger institutions or hedging corporates, yet there are strong returns to be made from this asset class, which the both the currency fund and the note will bring to a wider audience.”

He added: “When you are investing in currencies, ‘the trend is your friend’, so I designed the investment model to analyse textbook drivers of foreign exchange markets, and produce directional views on those currencies that we want to trade. The investment process also looks at the volatility and liquidity for each currency pair in order to size each position in the portfolio."

AAAM has a growing stable of hedge fund products. The company has launched a number of funds of hedge funds and added its first single manager vehicle earlier this year – the ABN AMRO Emerging Markets Debt Hedge Fund, managed by Raphael Kassin.

The company expects grow its hedge fund business with additional launches over the next nine to twelve months.