A.G. Bisset Associates
CURRENCY RESEARCH & INVESTMENT
DEFENSIVE CURRENCY ALPHA
February 28, 2013
Ulf J. Lindahl
Chief Executive Officer
www.agbisset.com
A.G. Bisset Associates
CURRENCY RESEARCH & INVESTMENT
Managing Currency Programs for Trusts, Endowments, Foundations,
Pension Funds and Family Offices in North America and Europe
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Systematic, Statistically-Driven Momentum-Based Investment Strategy
30 Years of Advisory and Currency Risk Management
24-Year Track Record in Currency Overlay
10-Year Track Record in Defensive Currency Alpha
Products
Defensive Currency Alpha
Active Currency Hedging (Overlay – Currency Risk Reduction)
Treasury Advisory Service
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What is Defensive Currency Alpha?
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Most investment portfolios have a large allocation to equities that results
in a significant exposure to bear market and period-specific losses
Investments in Alternative Asset Classes and Hedge Funds have provided
fewer diversification benefits than anticipated
Correlation between alternatives and equities increases in periods of stress
Currencies can provide enhanced diversification and reduced risk with returns
that can be negatively correlated with equities in periods of stress
Defensive Currency Alpha are strategies based on momentum and systematic
trend-following that mitigate “tail risk” by aligning currency positions with shortterm price-trends in currencies to generate positive returns
Positive returns can be generated whether equities are rising or falling
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Benefits of Defensive Currency Alpha
Adding currency to an investment portfolio can provide strong positive returns
that reduce losses when equities decline while adding return when equities rise
Currency returns are competitive with fixed income when interest rates are low
2000
Defensive Currency Alpha
Index
1500
S&P 500 Index
1000
750
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Logarithmic scale. Index 1000 beginning September 1, 2002
Live from Sep 2012. Gross Pro-Forma performance previously. Past performance is not indicative of future performance. Pro-Forma results have limitations.
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Correlations with S&P 500 Index
Fixed Income and Alternative Asset Classes generally failed to provide protection
during the Financial Crisis in 2008 when equities dropped
Hedge Funds have been more correlated to equities than generally anticipated
Annualized Standard Deviation
Investment Risk, Return, and Correlation
(September 2002 - present)
25%
20%
CRB Commodities
15%
Defensive Currency
Alpha
Citi US Investment
Grade Credit Bonds Citi High Yield Bonds
MSCI EAFE
10%
5%
0%
-0.4
Credit Suisse Hedge
Fund
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
Correlation to S&P 500 Index
Live from Sep 2012. Gross Pro-Forma performance previously. Past performance is not indicative of future performance. Pro-Forma results have limitations.
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Typical Currency Strategies
Strategies that exploit momentum to align currency positions with short-term
price-trends most reliably provide returns that are negatively correlated with
equities in times of market stress
CARRY
TREND
VALUE
Interest rate
based
Momentum
based
Fundamentally
based
Invest in
high interest rate
currencies
Borrow in
low interest rate
currencies
Long in
currencies with
positive momentum
Short in
currencies with
negative momentum
Buy
“undervalued”
currencies
Sell
“overvalued”
currencies
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Correlations with S&P 500 Index
Negative Correlation is Important Characteristic of Defensive Currency Alpha
FX Managers: Annualized Return & Correlation with S&P 500
(Jan 2008 - Dec 2012)
Size of Bubble = Annualized Volatility
NEGATIVE
CORRELATION
TOO HIGH
OPTIMAL PROFILE
DEFENSIVE ALPHA
Annualized Return
15%
10%
5%
0%
-0.7
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
-5%
-10%
Correlation to Equities (S&P 500)
Source: DB Select
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Academic Research
Persistence of price-trends and momentum can be exploited
Explaining the Returns of Active Currency Managers
Sam Nasypbek, Scheherazade S. Rehman
2011, Bank for International Settlements Working Papers No. 58, 211-248
Currency momentum strategies provide diversification in times of
extreme stress
Portfolio of Risk Premia: A New Approach to Diversification
Remy Briand, MSCI Barra, Frank Nielsen, MSCI Inc., Dan Stefek, MSCI Inc.
2009, MSCI Barra Research Paper No. 2009-01
Technical currency trading models have been consistently profitable
and have provided a valuable source of risk adjusted returns
Can Currency Movements Be Forecasted?
Richard M. Levich, Professor of Finance, New York University - Stern School of Business
1999, AIMR Conference Proceedings: Currency Risk in Investment Portfolios
Currency managers deserve a place in portfolios as alpha generators
Hunting for Alpha Hunters the Currency Jungle
Momtchil Pojarliev, CFA
Richard M. Levich, Professor of Finance, New York University - Stern School of Business
2012, Accessed August 15, 2012 at http://people.stern.nyu.edu/rlevich/research.html
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Risk & Return
Distribution of monthly returns of S&P 500 Index (2002-2012)
S&P 500 Index
Monthly Return Distribution
30
25
Count
20
15
10
TAIL RISK
5
0
-18% -16% -14% -12% -10% -8% -6% -4% -2%
0%
2%
4%
6%
8% 10% 12% 14% 16% 18%
Return Breakpoints
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Risk & Return
Typical characteristic of a momentum / trend-following currency strategy
is a positively skewed return distribution: “good volatility”
Monthly Return Distribution
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Observations
30
25
20
15
10
Returns are positively skewed
Limited
downside risk
5
0
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
Return Breakpoints
Alpha live from Sep 2012. Gross Pro-Forma performance previously. Past performance is not indicative of future performance.
Pro-Forma results have limitations.
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Diversifying Traditional 60/40 Portfolio
Defensive Currency Alpha on 1/3 of the S&P 500 portion of a traditional 60/40
portfolio increases its total return without increasing overall risk
20% Defensive Alpha Overlay + 60/40 Portfolio
2500
2000
Index
A.G. Bisset Defensive Alpha
1500
Traditional 60/40 Portfolio*
1000
750
2002
2003
2004
2005
* 60% S&P 500, 40% Citi US BIG Credit
2006
2007
2008
2009
2010
2011
2012
2013
Logarithmic scale. Index 1000 beginning September 1, 2002
Live from Sep 2012. Gross Pro-Forma performance previously. Past performance is not indicative of future performance. Pro-Forma results have limitations.
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Summary
Defensive Currency Alpha
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Mitigates “Tail Risk”
Tail Risk mitigation is becoming increasingly important as equity prices
climb and the risk of interest rates starting to rise increases with time
Defensive Currency Alpha can provide strong positive returns when equities
decline while contributing positive returns when they rise and fixed income
prices decline
Defensive Currency Alpha can provide superior diversification compared to
most other asset classes - most notably during times of market stress when
it is most needed
Defensive Currency Alpha is negatively correlated to declines in equities
and uncorrelated overall
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Disclosures
Past performance is not indicative of future results.
A.G. Bisset Associates, LLC is registered with the SEC as an Investment Adviser.
A.G. Bisset maintains a complete list and description of performance composites that are available upon request.
The management described herein is subject to normal market fluctuations and other risks inherent in managing
securities or other instruments. There can be no assurances that any gains will occur. Gains and losses may
occur. There can be no guarantee that the investment management objectives described herein will be achieved.
Performance record reconstructed based on live model signals used in management of live products with the
addition of evolving strategy enhancements applied back in time. Gross performance is pro-forma before live
management began in September 2012.
This document has not been registered with or approved by any governmental authority or other financial
regulatory organization.
Additional information regarding policies for calculating and reporting returns is available upon request.
Additional information is available at www.agbisset.com.
A.G. Bisset Associates, LLC
71 Rowayton Avenue
Rowayton, CT 06853 USA
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