Credit Suisse has launched Foreign Exchange Rolling Optimized Carry Indices offering investors a transparent method of participating in FX carry trading, using a framework of diversification through portfolio optimization.
Credit Suisse says the indices offer a new level of transparency in investable currency indices which include emerging markets.
The Credit Suisse ROCI Indices track the performance of portfolios of foreign currency positions, both long and short, against a selected base currency. Currency positions within each portfolio are derived from short-term interest rate differentials (or 'carry') against the base currency, such that the portfolio essentially buys higher yielding currencies and sells lower yielding currencies, all through cash-settled forwards. Portfolio compositions are optimized monthly to maximize expected returns while targeting annual volatility of 5%.
The Credit Suisse ROCI indices are available for four base currencies - US dollar, Euro, Sterling and Swiss franc - and for two underlying portfolios: the 'ROCI 10' indices invest only in the ten most liquidly traded currencies; the 'ROCI 18' indices include an additional eight less liquid, or emerging market, currencies to give investors the opportunity to participate in higher yield differentials and further diversify portfolio risk. The maximum investment in any one currency is constrained to limit exposure to individual country risks.
The indices are fully transparent. Forwards are traded and marked-to-market at independently published fixing rates and the index calculation methodology is fully disclosed. This eliminates trading bias and ensures there are no hidden trading costs to the investor. Participation in the indices is available through the purchase of certificates or total return swaps.
Over the last eight years, the optimized forward bias strategy has returned 17.1% p.a. with an annual realised volatility of 7.8% in the case of the US dollar based ROCI index with 18 underlying currencies. By comparison, the S&P 500 returned 3.1% p.a. with an annual volatility of 17.7% over the same period.
Joe Prendergast, Head of Global Foreign Exchange Research and Strategy at Credit Suisse, said: "We're pleased to provide this proven framework of well-diversified FX carry trading with a high degree of transparency across both major and emerging currencies. The ROCI indices provide a benchmark for cutting-edge FX carry trading."
The indices are displayed on Bloomberg under the code "ROCI".