Shortlist: Best foreign exchange hedge fund

Employing a short-term, technical and discretionary investment strategy, Capricorn sees its niche as a currency manager with its disciplined trading approach and years of currency trading experience.

The investment process is designed to channel the best trading ideas in the model portfolio that is then mirrored in client accounts. Using technical analysis and discretionary judgment, the investment team searches for investment opportunities wherever they occur in the G10 currency markets.

The fund aims to profit from short-term moves in the currency markets by using a technical and discretionary trading approach that seeks short-term intra-week investment opportunities. This means trading the most liquid currencies, taking a directional position in a particular currency while simultaneously taking the opposite position in another currency in an attempt to take advantage of relative valuation differences between the two.

The program realises short-term appreciation by trading in G10 currencies that as an asset class is uncorrelated to other investment strategies and securities. It is also one of the most liquid assets available to investors.

The investment team uses a trading approach that combines technical analysis and discretionary judgment. Technical analysis is used to provide an impression of the market pattern, level, volatility, strength and other factors as well as potential investment cases. The discretionary judgment is used for interpreting technical signals, understanding the market psychology and behaviour, controlling trade and investment risk and optimising the timing element of the strategy implementation.

As a supplement to the trading process, fundamentals such as key statistics are observed to identify inefficiencies in relation to new political, economic and other macro information. The manager then forms an opinion about the market, prevalent risks and determines which trading strategy – for example, trend trades, range or contrarian trades, breakout trades and tactical trades – to implement.

Portfolio diversification and risk management is achieved by trading a basket of currency pairs and instrument allocations. The program can invest in spot foreign exchange, forwards and options with trading possibilities in both the over-the-counter (OTC) and futures market. The program operates with a maximum leverage of 1:0.5.

The trading methodology is characterised by trend-following 30%; regression analysis 0%; moving average 30%; breakout systems 15%; market neutral 10% and 15% (momentum/price movement).

Risk management is embedded into every step of the investment process to ensure the risk and return profile of the trading strategy and that the portfolio is optimally balanced. The team will only consider trading ideas with a risk to reward profile of 2:3 so the potential upside of any trade idea must be one-and-a-half times larger than the inherent maximum risk.

Pre-determined stop-loss levels are established through technical analysis and are systematically placed against each open spot position. In adverse market conditions the team can buy long-only options to offset the relevant currency risk and reduce the undesired risk associated with trading.

By using a bought option to control the downside risk and reduce the portfolio’s daily volatility, the investment manager can eliminate part of the unrealised negative risk exposure. For example, when the market is under extreme duress – such as the technology crash, subprime crisis and Lehman collapse – a highly volatile market can reduce the liquidity of G10 currencies.

Fund facts
Full name of fund: Capricorn FXG10
Name of portfolio manager: Mikkel Thorup and Bjarne Jensen
Name of investment/management company: Capricorn Asset Management
Contact information: Capricorn Talstrasse 20, Postfach 2257, CH-8022 Zurich, Switzerland (+41-44 340 0080;  +41-44 355 3208 (fax); www.capricornfx.com)
Launch date: April 1, 2008
Assets under management: $11 million (at December 31, 2010)
Annualised return: 8.62% (at December 31, 2010)
Annualised volatility: 2.58% (over one year at December 31, 2010)
Sharpe ratio: 1 (over one year at December 31, 2010)
Strategy: foreign exchange
Prime broker: Deutsche Bank
Legal counsel: Drohan & Drohan
Domicile: Switzerland
Management fee: 2%
Performance fee: 40% above a hard hurdle of 7% a year with a high water mark
Minimum investment: $/€50,000
Lock-in: none
Redemption/liquidity terms: one month; no redemption penalties