Credit Suisse is promoting foreign exchange as a separate asset class to yield-starved investors in Japan as it strives to strengthen its currency business in the country.
The Swiss bank has just signed a deal to provide its FX Factor currency index for a privately placed investment trust managed by Shinkin Asset Management in Japan.
Ivan Chan, head of FX sales for Credit Suisse in Asia-Pacific, says: “We are moving into an area where FX is a separate asset class. It is a big thing in Japan, where the portfolios have a heavy exposure to bonds and equities. FX Factor provides an alternative for the Japanese investor to invest in.”
FX Factor was publicly launched in April 2009 in the aftermath of the global financial crisis for investors yearning for a diversified strategy uncorrelated to other asset classes.
The index provides access to a portfolio of macroeconomic and technical FX trading strategies using a risk-balanced, rules-based allocation process.
It uses six factors that account for a large proportion of FX movements – carry, momentum, valuation, growth, terms of trade and emerging markets – to allocate capital across G10 and eight emerging market currencies. These are then rebalanced on a monthly basis.
Credit Suisse FX structurer Adam Betteridge notes that these strategies are implemented for G10 and emerging market (EM) currencies separately, “allowing one to extract value from the EM space while that strategy might not perform in the core market space”.
He says this process is done in a risk-balanced way, with an index volatility target of 5% – meaning a client who wishes to have high exposure to the index can choose to leverage up.
“The index varies exposure to achieve the 5% volatility target,” explains Betteridge. “It looks at the risk from each individual strategy and combines them in a way that gives more weighting to strategies calculated as having a better risk-reward ratio. Strategies measured as having a higher crash risk will be underweighted.”
He points to transparency benefits, too, with Credit Suisse referencing World Markets (WM) fixing rates – the most heavily used of which is at 4pm London time. He adds that investors can now customise their FX exposure to control how much exposure they have to each strategy.
Since launch, FX Factor has returned between 2-3% on average. It was up 5.5% post launch in 2009, although it finished down by just under 1% during 2010.
“During bullish and bearish markets, the correlation between FX Factor and traditional asset classes has been low,” says Betteridge.
Credit Suisse recommitted itself to the Japanese market last year, with Chan doubling the size of his FX sales team to eight focused on corporates, asset managers, banks and retail aggregators (margin accounts). It comes after the bank hired Reiji Onizawa from Deutsche Bank in December 2009 as head of sales for Japan FX.
Separately, Credit Suisse also launched a long-short and a long version of a volatility index in December last year to provide investors with access to what it sees as relative value in G10 volatility.
“Extreme signals of richness or cheapness are traded upon using volatility swaps,” Betteridge explains. “The long-short version is seeming to be extremely good for providing a hedge against tail risks in terms of holding its value during calm markets, but showing sharp increases in value during explosions in risk.”