Merrill Lynch today announced the creation of ML FX Clone, a methodology for replicating hedge funds’ foreign exchange strategies that it says will help investors to better understand and ultimately access the FX markets with greater ease and at lower cost.
ML FX Clone is designed to replicate the most widely-used FX investment styles followed by active portfolio managers. Merrill Lynch says its research analysts have designed ML FX Clone for investors who wish to gain exposure to FX as an asset class or who wish to hedge underlying exposure to currency funds. ML FX Clone also helps investors to separate manager alpha — how much the portfolio manager contributes to returns — from beta — how much market factors contribute to returns.
“Our replication strategies offer attractive returns and diversification benefits similar to those of broad currency portfolio manager indices,” said Alex Patelis, head of global foreign exchange and local currency strategy at Merrill Lynch, in a news release. “However they are more transparent, have greater liquidity, little manager risk, and have potentially lower trading and transaction costs.”
ML FX Clone was developed to help make foreign exchange a more accessible asset class by providing more information and insight on the three investment strategies that FX portfolio managers most commonly use: momentum, the carry trade technique, and the U.S. Dollar method, in which investors take a view on a currency relative to the value of the U.S. dollar.
Merrill Lynch analysts have established a high correlation between the ML FX Clone model and existing benchmark currency market indices, including the Parker FX index. This indicates that the process can capture much of the variability in the returns achieved by different portfolio managers.
The firm reported that its backtesting analysis shows that ML FX CLONE achieved an average annual return of 9.1% with only one year of negative returns since 1989.
Merrill Lynch model replicates hedge fund FX strategies
Model designed to replicate the most widely used FX investment styles followed by active portfolio managers
- By: James Langton
- March 22, 2007 March 22, 2007
- 15:40