FX INDEX ARB is a systematic, quantitative trading program, which trades currencies in the cash markets. The strategy creates a complex portfolio of 10 global (G10) currencies and adjusts its components daily.
The strategy forms indexes of the 10 base currencies, which depend on the prices of the remaining 9 currencies against the index currency. It trades (counter trend, short volatility) the components of each index against the index itself (trend following, long volatility). Exactly the same rules are used for the trend and counter trend trading. The objective is to exploit the difference between the higher volatility in individual components and the lower volatility of indexes (as proven by the Modern Portfolio Theory). Based on positions of components and indexes (a total of 90 currency crosses), positions are then consolidated into the base 10 currencies, i.e. 9 currency pairs against the US Dollar. The resulting positions are then implemented in the market. The trading strategy is always in the market, but portfolio weights are adjusted daily.
Risk control is achieved through a variety of means which in most market conditions should minimize drawdowns. The first is portfolio construction and diversification (trend and counter trend trading in indexes and their components); second is portfolio concentration control through position size adjustment according to account size, volatility and risk-reward analysis (the position size limit for each currency is around 0.9 of NAV); and third is a catastrophic stop based on money management rules (can be selected by the investor).
Back testing results of the currently traded strategy (as extrapolation into the past) are available upon request.
Monthly returns are based on proforma adjustments to a proprietary account to reflect fees. Client accounts will be traded in like fashion.