The Financial Times has reported that Barclays Capital have launched an [tag]automated foreign exchange[/tag] currency fund, which seek to undercut human-managed funds. The new fund joins similar automated [tag]hedge funds[/tag] from Merrill Lynch and Goldman Sachs. From the article:
“The Barclays Intelligent Carry Index targets the yield pick-up available from the world’s 10 most liquid currencies. Rather than just build long positions in higher-yielding currencies and short positions in low yielders, two risk control measures will be applied.
First, the index targets annualised volatility of 5 per cent, meaning positions are scaled down in times of high volatility and up when volatility is muted. Secondly, a correlation adjustment is applied, scaling back positions if the methodology produces too many positions in currencies that are historically correlated.
. . .
In an [tag]efficient market[/tag] a pure carry approach should produce zero return, as currency is a zero-sum game. In theory, the yield pick-up between, say, sterling and the yen, should be balanced by the spot rate moving by a similar extent in the opposite direction.
However, there is a widespread view that beta does exist because of the preponderance of trading by non-profit maximisers, such as central banks and companies engaged in cross-border trade. The carry trade also appears to benefit from a pricing anomaly known as the forward bias, which means movements in spot prices tend not to cancel out the yield pick-up.
Barclays’ back-testing indicates the index would have produced annual returns of 11.7 per cent since January 2000, after charges.”