Shortlist: Best foreign exchange hedge fund

Winner 2010: Best foreign exchange hedge fund

The Emerging Markets Alpha Currency Programme has generated strong returns since its debut, withstanding ructions in emerging markets in recent years. The fund has annualised returns of 14.2% and has never had a negative year. In 2010 it gained 7.7%.

The fund is well positioned to exploit the current macro environment as currencies are the best way to gain exposure to emerging markets, particularly as market consensus expects central banks to continue hiking rates to combat inflation.

The fund is designed to exploit inefficiencies that are more extreme in emerging markets than in the G10 markets. These include low transparency, information asymmetries with uneven distribution of information, and interference by the central banks in the currency markets which is routine.

This has been more prevalent in the last 12 months with an unprecedented level of intervention by central banks seeking to weaken their currencies. These practices mean the strategy of the alpha programme receives 'cleaner' trading signals. Event risk is also moderated significantly by the use of portfolio managers to implement trades generated by the system, so the managers are proactive in managing positions.

The aim is to profit from short and medium-term moves in the developing markets’ currency pairs. To achieve this, the firm employs a largely systematic approach, designed to perform across diverse market environments. The process combines three decision-making tools: a systematic technical strategy, a systematic fundamental strategy and a market information strategy.

During periods of higher volatility, the systematic technical strategy uses a series of proprietary trading algorithms operating over multiple timeframes. The algorithms combine trend-continuation and trend-reversal signals.  During periods of lower volatility, the systematic fundamental strategy reflects a predetermined set of positions designed to reflect ‘market’ views on the relative attractiveness of currencies versus the US dollar, thereby realising the inherent benefits of the carry trade. 

The market information strategy leverages the experience and global network of the portfolio managers to understand and exploit the behaviour of other market participants and to participate in hedging and investment flows. 

The Cambridge Strategy maintains a research program to keep alpha generation signals current, strengthen risk management and keep abreast of changes in the market.

The set-up and processes of the company reflect the lessons learnt by the principals over a collective 70 years’ of experience in the financial services industry. The principals have focused on the region for most of their careers. Alexandra Edstein, the portfolio manager running the Asian Alpha Currency Fund, has spent many of her 25 years in financial markets trading or market-making Asian currencies.

The disciplined approach to risk management significantly reduces the volatility inherent in approaches taken by other market participants. The Cambridge Strategy believes long-term success is achieved through successful mitigation of downside returns with risk controlled at the portfolio, strategy and individual trade levels.

While a daily value at risk (VaR) limit is enforced at both the aggregate portfolio and sub-strategy level, a further layer of risk mitigation is incorporated within each strategy.

For the systematic technical and market information strategies ‘left side’ tail risk is monitored at the trade and portfolio level using a proprietary methodology grounded in extreme value theory. Within the systematic fundamental strategy, the aggregate net US dollar exposure is maintained at zero.

Fund facts
Full name of fund:  The Cambridge Strategy Emerging Markets Alpha Programme
Name of portfolio manager: Russell Thompson
Name of investment/management company:  The Cambridge Strategy
Contact information: 36-38 Berkeley Square, London W1J 5AE (derek.doupe@thecambridgestrategy.com; www.thecambridgestrategy.com)
Launch date: February 1, 2008
Assets under management: $125 million (at December 31, 2010)
Net cumulative performance since inception: 147.4%
Annualised return: 14.2%
Annualised volatility: 7.6%
Sharpe ratio: 1.7
Strategy: emerging markets currency; systematic technical and fundamental
Administrator: AIS Fund Administration
Auditor: KPMG
Custodian: JP Morgan
Prime broker: Band of America Merrill Lynch
Domicile: Cayman Islands
Management fee: 2%
Performance fee: 20% with a high water mark
Minimum investment: $250,000 (managed account ($10 million)
Lock-in: none
Redemption/liquidity terms: monthly with seven days’ notice