Forex Portfolio Allocation _PDF_ - Forex Portfolio for January 2011 by dfsiopmhy6


									                                                                                            January 3, 2011

Mads Koefoed
Macro Strategist
+45 3977 4942       Forex Portfolio for January 2011
                        The model is rebalanced monthly on the first Danish business day 12 CET.

                        The model returned 1.43% in December; primarily through heavy long exposure to

                        The model remains bearish on USD and EUR, but has also turned bearish on GBP.

                        The model has returned 9.02% YTD.

                        The annualised return since inception is 7.75%.

                    Allocation in January

                    The Forex Portfolio remains firmly negative towards the USD and to a lesser extent
                    towards the EUR. Both net short positions have not changed much in December, but the
                    model has also turned quite bearish on the GBP.

                    The biggest long positions in EUR are against the US dollar, the Norwegian krone, and
                    the Aussie. However, the EURUSD long position has been toned down further in

                    The Swedish krona is still the most preferred currency against the EUR, but the long
                    exposure has been reduced. The CHF is also still preferred versus the EUR, but it too sees
                    a reduction in its exposure. The EURNZD sees the biggest change to a sizable short

                     EUR-denominated account       USD-denominated account         GBP-denominated account

                                 EUR 1 million                 USD 1 million                      GBP 1 million

                    EURAUD           165,636      AUDUSD           -162,390        GBPAUD             165,636

                    EURGBP            -33,476     GBPUSD              21,602       GBPUSD             280,735

                    EURUSD           280,735      USDCAD              45,940       GBPCAD               45,940

                    EURCAD             45,940     USDCHF           -294,241        GBPCHF             -294,241

                    EURCHF           -294,241     USDJPY              18,234       GBPJPY               18,234

                    EURJPY             18,234     USDNOK            166,193        GBPNOK             166,193

                    EURNOK           166,193      USDSEK           -327,146        GBPSEK             -327,146

                    EURSEK           -327,146     EURUSD           -160,186        EURGBP             -248,221

                    EURNZD           -235,088     NZDUSD            302,417        NZDGBP             468,624

                    The allocations above are based on an account size of EUR/USD/GBP 1,000,000. A
                    spreadsheet for calculating allocations for custom-sized accounts can be found under
                    Forex Portfolio Model Allocation at
                                                                                                       January 16, 2011

                                The Saxo Bank Forex Portfolio Model
Forex Portfolio:
                                The model was built in the years 2006-2008. It was completed at the height of the credit
Realized Returns                crisis in the fall of 2008. We have, therefore had a good chance to see if back-testing
Month              Return (%)   results are solid, which they appear to be.

2009 October             0.32

2009 November            0.68
                                Allocation update
2009 December           -0.31

2010 January            -0.41   The model will be published on by Saxo Bank on the first banking

2010 February            2.10
                                day of the calendar month. While Saxo Bank publishes the model’s suggested allocation,
                                the bank is not responsible for the monthly reweighting of the portfolio.
2010 March               0.17

2010 April               0.59   For a EUR-denominated account, the sum of all EUR positions following the model will
2010 May                 0.96   deviate from the amount allocated to follow the model. For example, the holder of a EUR
2010 June                3.60   1 million account might choose to allocate EUR 1 million to follow the model, but the sum

2010 July               -1.62
                                of EUR exposure will not equal EUR 1 million. The reason is that one needs to look at the
                                net exposures. If the model is long 100,000 EURUSD and short 100,000 EURJPY, the net
2010 August              3.38
                                exposure in EUR on these two positions is actually zero. The sum of total position sizes in
2010 September          -0.80
                                EUR might therefore deviate from EUR 1 million, since the model is only looking at net
2010 October             0.49
                                exposures of the currencies in question. The reason is that the model follows 10
2010 November           -1.06
                                currencies, but the net exposures are established via only nine crosses. The sum of all
2010 December            1.43
                                these exposures is then either net long or short, depending on the model’s prediction on
YTD                      9.02   EUR itself.
Since inception          9.77
Since inception
                                The model input

                                The model’s inputs are the Saxo Bank Fundamental Strength Indices which measure the
                                underlying economic strength (contraction or expansion) of the following 10 currencies:
                                NZD, AUD, CAD, JPY, EUR, GBP, USD, CHF, SEK, and NOK. Allocations are presented as
                                net exposures against EUR, USD, or GBP to reduce both the number of possible
                                combinations and most illiquid crosses.

                                Returns are based on Bloomberg monthly carry-adjusted currency data. The model is
                                based on Saxo Bank’s standard FX spreads. The model does not take into account fees
                                for minimum size FX trading.

                                The overall idea

                                The allocation signals are generated by changes in spreads between the Saxo Bank
                                Fundamental Strength Indices. More capital is allocated to currencies with relatively
                                strong economic activity (and positive rate outlook), funded by short positions on
                                currencies with weak economic activity (weak rate outlook). For example, if the
                                Eurozone Fundamental Strength Index suddenly drops (increases) relative to the US
                                Fundamental Strength Index, the model, all else being equal, would reduce (increase)
                                exposure to EURUSD. Additionally, positions are scaled up or down according to the
                                volatility of the currency crosses in question so the expected risk-adjusted return for
                                positions in EURCHF is the same as for positions in the normally more volatile EURCAD.

                                                                         January 16, 2011

Attractive features

The model is always well diversified and is always in the market. It is therefore not
exposed to “timing issues”. It does not use stops, since the overall volatility of returns
tends to be low (especially on single leverage). One particularly interesting feature is
that returns tend to be almost completely uncorrelated to returns in stock markets
(correlation = 0.10) and other risky asset classes (correlation to the CRB Index is 0.11).
Therefore, if the back-testing since 1991 is indicative of future returns, it would make a
lot of sense to use part of one’s portfolio to allocate to the FX Model and thereby
decreasing overall portfolio volatility without lowering returns too much (depends on the
leverage used) or at all.

                                                                                                              January 16, 2011

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