Forex as an Asset Class

  • FX investment offers consistent returns and a low correlation to equities and bonds.
  • A 30% portfolio allocation to FX can increase the Sharpe ratio on that portfolio from 0.43 to 0.62.
  • It can also reduce the worst case performance scenario on the portfolio from an 18% loss to a 9% loss.

Benefits of Trading Forex

Massive Liquidity – Around $1.7 trillion is traded on the FX market each day, more than twenty times the daily turnover of the New York Stock Exchange and three times that of the US government bond market.
Trading Strategy Indices - A range of indices that track the performance of particular FX trading strategies such a Carry, Momentum and Valuation are offered by Deutsche Bank.
Low Correlation – FX returns have a very low correlation with bond or equity market returns. Between 1980 and 2006, they had a 5% correlation with equities and a minus 21% correlation with bonds. Equities and bonds, meanwhile, had a 26% correlation rate over this period.
Identifiable Beta – We have evidence that positive returns can be generated by pursuing a combination of the above widely-known trading strategies. What is less widely known is that the introduction of FX in a properly constituted portfolio of other assets can actually reduce the probability and severity of drawdowns. This means that many participants in the FX market trade to hedge exposures rather than to generate investment profit.
Low Volatility – Between 1980 and 2006, the DBCR generated losses in just six out of twenty six years. The S&P 500 and MSCI government bond index generated losses in x and y of those years respectively.
Superior Risk Adjusted Returns – when total returns are adjusted to take volatility into account, the DBCR generated higher annualized returns between 1980 and 2006 than either the S&P 500 or the MSCI.
Benchmark Indices – Deutsche Bank has developed a benchmark index, the Deutsche Bank Currency Returns (DBCR) index that allows investors to compare FX returns to other asset classes, and obtain other data.
Consistent Returns – the Deutsche Bank Currency Returns Index, which tracks the performance of a diverse FX investment portfolio, delivered annualized total returns of 11% between 1980 and 2006.