F&C Alternative Investments has launched fund raising for its F&C Garnet Fund, a hedge fund that aims to achieve absolute returns by investing and trading in the foreign exchange v
F&C Alternative Investments has launched fund raising for its F&C Garnet Fund, a hedge fund that aims to achieve absolute returns by investing and trading in the foreign exchange volatility and forward rate bias area.
The fund, which is targeting an annual return of between 12 and 15 per cent and a Sharpe ratio of more than 1.5, was launched last November with capital from existing F&C clients and is now targeting institutions, funds of hedge funds and other professional investors.
The F&C Garnet Fund is part of F&C’s Gemstone hedge fund range. Managed by Dr Stephen Dolbear, its portfolio concentrates on capturing the varying risk premiums embedded in foreign exchange volatility and forward rate bias positions, rather than seeking to compete with conviction-driven macro players.
Dolbear has a successful track record in managing the F&C Amethyst Fund, an equity volatility trading vehicle. With more than 20 years involvement in derivative markets, he is an experienced practitioner in foreign exchange derivatives with a strong quantitative background.
‘There are many participants in the FX options arena and past history indicates that there has been a tendency for options to be slightly expensive,’ Dolbear says. ‘Back tests also reveal that bias is variable over different time periods, currency pair and options tenors. Our fund buys and sells volatility instruments to profit from temporary anomalies.’
Over the last few years, he notes, many academic papers have investigated whether the forward exchange rate is an unbiased estimate of the future spot level, and, overwhelmingly, they have concluded it is not: ‘In fact the average finding indicates that a forward rate discount is more likely to be followed by a future spot strengthening.
‘FX volumes are dominated by players whose trading decisions are not influenced by market inefficiencies such as FRB. Speculators attempting to play FRB transact relative small volumes and therefore do not correct this bias. Efforts to capture FRB can lead to disappointing risk/return trade-offs unless enough skill and common sense is applied to the portfolio construction process.’
Alex Ingham Clark, marketing director at F&C Alternative Investments, says: ‘FX is a very attractive area due to its low correlation with other asset classes. The equity markets have had a tremendous run, but there is a perception amongst investors that this can’t go on forever and therefore they are looking for a diversifier.
‘Currencies move in relation to each other, and there is always the opportunity to make money. Stephen has a unique talent when it comes to trading, and we believe this is a really exciting product with a very attractive risk/return profile due in part to the effective diversification offered by the volatility book and the FRB book.’
The F&C Garnet Fund is listed in Dublin and has a minimum investment of EUR500,000. The management fee is 1.5 per cent per annum, with a performance fee of 20 per cent linked to a high water mark.
F&C Asset Management Group, which has its headquarters in the UK and is listed on the London Stock Exchange and majority owned by insurer Friends Provident, managed assets totalling GBP102.7bn at the end of March for institutional, insurance and retail clients and has offices in France, Germany, Ireland, the Netherlands, Portugal, Switzerland and the US.
