# Alder Capital – the best performing unit linked fund?



## Cynic (18 Jan 2002)

In an article in yesterday’s Indo, Bill Tyson reports that Alder Capital has an extraordinary record in trading currencies.

When the two executives worked for Gaicorp in the IFSC their currency trading fund was the third best currency fund over a three year period.

Last year their fund earned 17.5% which makes them Ireland’s best performing unit linked fund. 

They say that their fund is less risky than equities because equities can all go down together whereas the gain in one currency is matched by the loss in another. However, they wouldn’t sell their fund to widows and orphans. Why not if it’s less risky?

The only way to access the fund is through Friends First with a minimum investment of £50,000. <!--EZCODE ITALIC START-->_ The boss_<!--EZCODE ITALIC END--> won’t like the charges: 2% per annum + 20% of all profits in excess of 7%. 

If they are so great why haven’t we heard of them before?

Cynic


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## CM (19 Jan 2002)

*Hedge Funds*

As far as I understand it Alder Capital via Friends First offer hedge funds. I dug out [broken link removed] which seems to be a fairly good introduction/overview of what a hedge fund is in case it's of interest...


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## Mithrandir (19 Jan 2002)

*Alder's Message*

Hiya Cynic,

You may have the wrong steer. This isn't about comparing equity risk to currencies. The message is that, pension funds like those in the US are recognising that there is a 'fifth element', and that currency trading, between the four major currencies, Swiss Franc, Dollar, Yen, and Euro, making gains and losses on the movements as between them, has a role to play in improving the risk and reward tolerance of portfolio's.

This has little to do with the absolute risk of the activity, and everything to do with the entirely uncorrelated relationship between it, and equities, bonds, property and cash deposits. The Alder proposition appears to be that the inclusion of currency trading, when done well,and limited in its allocation, improves the risk reward trade off. The results of the past year reinforce the message.

Closet tracking in the Irish market is clearly a problem in getting funds to adopt to the new asset class. But the message is a valid one, and the Alder model which originally I studied as a skeptic, bears serious consideration. I have included it consequently, and to a strictly limited and conditional manner in client recomendations for 'growth' strategies. Investors who've adopted it have been rewarded, so far.

Their model is based on the hourly movement across these currencies since 1990,( using the DM before the Euro), and is retuned from time to time by Alder, one of whose senior managers is an award winning Irish mathematician, ex Trinity, and they appear to know their stuff. This is not an unconditional endorsement, merely a warning not to write this emerging asset class investment off as a flash in the pan. It is not. But I'd be interested in informed views from AAM contributors on the subject. Any takers?


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## Rupert Bear (19 Jan 2002)

*Re: Gambling*

I thought <!--EZCODE ITALIC START-->_     Clubman's_<!--EZCODE ITALIC END--> link provided an excellent overview of this concept.

<!--EZCODE ITALIC START-->_    Mith_<!--EZCODE ITALIC END-->, I am amazed that you, of all people, have any truck with this Hedge Fund thing.  Don't you argue that active management is a waste of space and that one might just as well blindly track an index.

Let's consider <!--EZCODE ITALIC START-->_     Currency Funds_<!--EZCODE ITALIC END-->.  Currencies are a zero sum game (negative after costs and charges).  Investing in a Currency Fund is blind faith in the skills of the manager.  At least with an active fund manager one will make money in rising markets even if the manager himself adds no value.  In a Currency Fund the only possible gains can from the management skills or good fortune of the manager.

The culture of this game is that past performance is EVERYTHING, some sort of proof that our man knows how best to play the great currency poker game.  There is no point in ignoring past performance, as looking forward in a zero sum game produces zero.

The scandalous trickery is that the very many Hedge Funds and Currency Funds who lose at the tables quietly fold their cards and reappear with a new pseudonymn. The result is that the "live" database appears to have a preponderance of winners but the fact has to be that there are just as many losers, (albeit no longer on the database or touting for business), to counter the winners in the zero sum game.

Correction, there are <!--EZCODE BOLD START-->* big*<!--EZCODE BOLD END--> winners in this game, the card sharps themselves who charge outrageous fees.  If they win they cream it. If they lose, try again.  I thought at least this aspect would have offended you, <!--EZCODE ITALIC START-->_     Mith_<!--EZCODE ITALIC END-->.  You ain't the same iconoclast I have grown to know and respect if you support this nonsense.
:rupert


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## Mithrandir (20 Jan 2002)

*Interesting Views*

Rupert, that was interesting. Perhaps I need to dig a little more. What would you recommend?


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## Brendan Burgess (20 Jan 2002)

*Re: Interesting Views*

Hi Rupert

In another post someone referred to the stockmarket as a second-hand market. This presumably applies even more so to currency funds. 

I think most of us would accept that equity fund managers can't beat the market consistently over the long-term and so past performance has no implications for future performance. 

Most of us would reject technical analysis for equities.

I know nothing about currencies. <!--EZCODE ITALIC START-->_ In theory_<!--EZCODE ITALIC END-->, the efficient markets hypothesis should apply even more strongly to currencies - a much more homogeneous product with very restricted opportunities for insider trading.  

I accept fully that currency trading is a negative sum gain and there must be some big losers who slip quietly away into the night. But in practice, are there many consistent long-term winners? I know that Shane Whelan's report for Hibernian Investment Managers did find patterns in currency movements but not in equities. Is Soros a one off, like Buffett?

Brendan


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## Mithrandir (20 Jan 2002)

*Suggestion*

Why don't we invite Mark Caslin, or Brian O'Mahony of Alder on to this thread, and get an informed debate going? I'll give them a ring on Monday, if you think that's helpful. What do you think Rupert?


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## Rupert Bear (20 Jan 2002)

*Re: You can't make money from nothing*

Hi <!--EZCODE ITALIC START-->_    Mith_<!--EZCODE ITALIC END--> and <!--EZCODE ITALIC START-->_    Boss_<!--EZCODE ITALIC END-->,

I found <!--EZCODE ITALIC START-->_    Clubman's_<!--EZCODE ITALIC END--> link most illuminating.  <!--EZCODE ITALIC START-->_    George Soros _<!--EZCODE ITALIC END-->got lucky or perhaps even called it well at a time when markets still had lots of arbitrage opportunities, and he reached a situation where he was so powerful that his bets were self fulfilling. I don't think that still applies.

Let's get down to some basic facts of life.  Hedge Funds claim to make double digit returns come hell or high water - they simply play the markets, doesn't matter whether the markets are rising or falling, Hedge Funds will return DD growth.

Come on!! If we believed that why would we advise anybody to go into anything but Hedge Funds?  I must insist that Hedge Funds are speculators/gamblers.  Some will win spectacularly some will lose spectacularly.  My argument is that there is a distinct bias towards publicising the winners and letting the losers (probably the same guys in different pseudonymns) slip away into the night.

If Hedging was such an easy money spinner these card sharps wouldn't share it with us ordinary mortals.  Instead they are on to the greatest wheeze you can imagine.  If they get their bets right they get nice fat fees from the punters, if it all goes wrong, no pain, just fold up and try again.  Why aren't their fees symmetrical? - if they win, fair enough, give them  20% of the growth, but if they  lose they should have to stomp up 20% of the loss.  And pigs might fly!!
:rupert


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## Rupert Bear (20 Jan 2002)

*Re: Suggestion*

Missed that post, <!--EZCODE ITALIC START-->_ Mith_<!--EZCODE ITALIC END-->.  I think that would be an excellent idea.  Is there some systematic reason why currency traders should do well or is it a truly zero sum game, the winners being matched by the losers?  If there is a systematic reason why currency traders should make money why don't they accept symmetrical fee structures - 20% of the return be it gain or loss?
:rupert


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## rainyday (20 Jan 2002)

*Re: Suggestion*

<!--EZCODE QUOTE START--><blockquote>*Quote:*<hr> But I'd be interested in informed views from AAM contributors on the subject. Any takers?<hr></blockquote><!--EZCODE QUOTE END-->

Here's an uninformed view (after reading Clubman's link) - Why not just bring your hard-earned down to the nearest Paddy Power's outlet, throw it across the desk to the clerk and ask them put it on their best bets (after taking a slice off for themselves of course).


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## Copernicus (20 Jan 2002)

*More background reading*

For anyone who wants to read more about hedge funds, John Caslin (an actuary and brother of Mark Caslin of Alder Capital, if I'm not mistaken) has produced an excellent, very readable paper on the subject.

There's a summary of the paper on [broken link removed].  The full text is also available for download (from the main page [broken link removed], but note that it's a big file - 1.75 Mb.


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## Brendan Burgess (21 Jan 2002)

*Re: More background reading*

This document on Hedge Funds is very good reading, but...

It makes the fundamental error made by most people in its definition of risk:

<!--EZCODE QUOTE START--><blockquote>*Quote:*<hr>  But what of the risk (as measured by standard deviation) <hr></blockquote><!--EZCODE QUOTE END-->

This is a definition of short-term risk and not long-term risk. Most investors have a long-term horizon and short-term risk/volatility/standard deviation is of no real concern to them.  

I know that my equity portfolio has a high short-term risk, but it's irrelevant. Its long-term risk is lower than any other asset class.

I suspect that highly leveraged currency trading has a much higher short-term and long-term risk than a balanced portfolio of equities. Although Hedge Funds started out with an objective or reducing volatility and improving returns, it seems that they have dramatically increased the blow-out risk e.g. LTCM . 

By the way, the acknowledgements include:<!--EZCODE ITALIC START-->_ three hedge fund practitioners, Pramit Ghose, Mark Caslin & Brian McCarthy._<!--EZCODE ITALIC END-->

Brendan


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## Mithrandir (21 Jan 2002)

*Don't jump to prejudice*

Listen folks, currency trading is a recognised area of investment. Writing off the entire global market  because it conflicts with ones hard held belief system about money and how to make it, seems a little premature. And none too scientific. Let the debate develop but for heavens sake don't go strangling the idea at its birth on AAM.

Monday is an opportunity to let others in with views. What d'ya think girls?


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## CM (21 Jan 2002)

*Hedge fund discussion*

Well said. However I guess that there may be a certain amount of knee jerking going on - in part because the original poster seems to be pointing out that the Indo/Alder seem to be making unreasonable claims/insinuations that, with the Alder fund somehow the only way is up! By all means let's have a reasoned discussion of hedge funds and other currency trading based instruments but, on the other hand, let's not allow ridiculous claims to go unchallenged. (By the way Mith - I'm not suggesting that you would ever do this!  )


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## Dynamo (21 Jan 2002)

*Currencies*

Not an expert on currencies by any means, but have had some dealings with US players in currency management.

They claim that to argue that currencies are a super-efficient market (which they would appear on the face of it to be), and hence a zero-sum game, is not correct. There are two main reasons for this:
1. Not all players in currency markets have the same motivation. Some, notably corporates, are more interested in achieving <!--EZCODE BOLD START-->* price certainty*<!--EZCODE BOLD END--> than achieving <!--EZCODE BOLD START-->* best price*<!--EZCODE BOLD END-->. Hedgers seeking price certainty are prepared to pay a small premium for that certainty, which creates an arbitrage opportunity for experts to exploit.
2. Currency markets display extremely strong momentum characteristics - ie a currency which is doing well is highly likely to do even better, and one which is doing badly is highly likely to fall further. Experts may be able to exploit that momentum profitably, provided they have good risk management strategies to close off positions.

Certainly, as Mith says, there is quite a bit of evidence to support the contention that high-quality currency management can add fairly marginal value to portfolio returns over time, even after costs.


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## Grundy (22 Jan 2002)

*TINSTAAFL*

WADR, I have to take issue with <!--EZCODE ITALIC START-->_ Dynamo_<!--EZCODE ITALIC END--> who posits that because some players are prepared to pay over the odds for currency certainty that of itself creates arbitrage opportunities.

Consider commodity markets e.g. Oil.  There are players in the Oil market who are prepared to pay almost anything for Oil - e.g. Airlines.  But that does not create an arbitrage.  The market is a deep liquid market and if an arbitrage existed the traders would close it off.  Thus the fact that Airlines will pay anything for oil is already in the supply/demand dynamic and fully priced by the arbitrageurs.  Similarly the fact that some people will pay "over the odds" for currency certainty will be priced into the currency markets.  In the immortal words of <!--EZCODE ITALIC START-->_ Mithrandir_<!--EZCODE ITALIC END--> <!--EZCODE BOLD START-->* TINSTAAFL*<!--EZCODE BOLD END-->.


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## Brendan Burgess (22 Jan 2002)

*Re: TINSTAAFL*

I have always wondered why there were so many currency traders in the big banks? I assumed that they were effectively acting as wholesalers and so they were getting the margin out of their customers. In other words, if I buy sterling, I pay a higher rate than my dealer in Bank of Ireland will buy it. 

But I realize that genuine currency transactions represent only a tiny fraction of the huge volume of currency trading that takes place every day. 

So most of the trading is pure trading, which is a zero-sum or negative-sum game. If Alder is always or mostly winning, then someone else is always losing. Who are the losers? Presumably they must be financial institutions?

Brendan


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## Dynamo (24 Jan 2002)

*TINSTAAFL but TINASAYSTT*

(The second one means "this is not as simple as you seem to think." Neat, huh)

I didn't say there was a free lunch in currencies. It may be a very expensive lunch. It may be very hard to find. All I said was that experts in the field argue that there may be food available.

Not sure I agree with your oil analogy, Grundy. Firstly, even in the circumstances you suggest, if a hedger is prepared to pay up for price certainty, then he might do so even over the (higher) price established by the market. Secondly, oil prices have been determined historically more by supply issues (from a cartel) than anything else. But most importantly, I think it misses the dynamic element present in currencies. Hedgers presumably sometimes want dollars, sometimes euro, sometimes sterling, sometimes yen. And they're prepared to pay in sometimes dollars, sometimes euro, sometimes sterling, sometimes yen. And they operate in an enviroment where other influences are also affecting the prices of these currencies. Smart people feel they can take (a relatively small) advantage of that. Sorry for using the word "arbitrage" sloppily in the last post, by the way. I meant price inefficiency rather than arbitrage in the classic sense.

Brendan, if you're looking for long-term losers in the currency markets, look no further than Central Banks. Their constitutions almost pre-ordain them to be losers .. they buy their (or someone else's) currencies when they're under pressure (ie the market believes them to be overvalued), selling other currencies to do so. And the rest of the time they are essentially passive investors with no significant return objectives.

It's the differing motivations of corporates, Central Banks, travellers, etc, that provide the price inefficiencies that currency experts claim to be able to exploit. So it may not be the zero-sum game you think it is.

If you're interested, have a look at the following links:  www.bwater.com/research_currency.htm.


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## Grundy (24 Jan 2002)

*ITWSATAAFLWWAIIAE*

<!--EZCODE ITALIC START-->_ If there was such a  thing as a free lunch why would anybody invest in anything else"_<!--EZCODE ITALIC END-->

Still not convinced <!--EZCODE ITALIC START-->_ Dynamo_<!--EZCODE ITALIC END-->.  The currency markets are as perfect as you can get.  There are lots of supply/demand punters whose simple objective is to buy (sell) at whatever price the market will charge.  But <!--EZCODE UNDERLINE START--><!--EZCODE ITALIC START-->_ <!--EZCODE BOLD START-->* at the margin*<!--EZCODE BOLD END-->_<!--EZCODE ITALIC END--><!--EZCODE UNDERLINE END--> it is the speculators whose objectives are completely beneath suspicion, they have no bias one way or the other - they simply want to make a fast buck (or € or £ whatever).  If as a group the speculators spot a distortion in underlying supply/demand they will pounce on it.  The only way for a speculator to win in this game is to be ahead of the other speculators.  I absolutely insist that the only way for a speculator to make money is to be smarter than the other speculators <!--EZCODE BOLD START-->* consistently*<!--EZCODE BOLD END-->.

<!--EZCODE BOLD START-->* THERE IS ONE BIG EXCEPTION*<!--EZCODE BOLD END-->,  as you point out <!--EZCODE ITALIC START-->_ Dynamo_<!--EZCODE ITALIC END-->, every now and again, on a black Wednesday, some mad government simply throws money at the markets.  But even here, there are speculators who get badly burned, those who get charged massive interest rates and lose the nerve or capacity to sit it out to the eventual devaluation.:smokin


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## Homer (24 Jan 2002)

*The New Dot.coms?*

Call me a cynic, but all this talk about double digit returns reminds me of how easy it was to make money on dot.coms.

Homer


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## Dynamo (24 Jan 2002)

*Currencies*

Hi Homer,

Don't include me in the double-digit return camp. I have said throughout the thread that good-quality currency managers may be able to add very small amounts of value on a reasonably consistent basis. That's all.

I meant to say at the outset that I don't condone for a second comparing Alder Capital's 2001 return with unit-linked funds generally and determining that it was the "best performing" blah blah. Another case of apples and oranges and sadly (as Mith would say) more <!--EZCODE BOLD START-->* nonsense*<!--EZCODE BOLD END--> from the pen of Niall Brady. What you'd need to do is compare Alder's return with that of other currency funds taking similar levels of risk, not with equity, bond, and property funds.


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## Homer (24 Jan 2002)

*Currencies*

Hi Dynamo

I wasn't suggesting that everbody bought into the double-digit return camp. There has been plenty of reasoned argument by you and others about what it might be reasonable to expect from currency funds.

My posting was intended as a wry comment on the eternal appeal of the 'easy buck' and how we would all like to believe that such a thing exists.

Homer


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## Brendan Burgess (25 Jan 2002)

I met with Mark Caslin and Brian McCarthy of Alder Capital yesterday and here are my observations:

First let me say that I don't have the training and resources necessary to evaluate what they are doing properly so I am putting up these comments and questions for critical analysis. 

<!--EZCODE BOLD START-->*   What I learnt*<!--EZCODE BOLD END-->
My starting point was that the currency markets must be efficient and they suggested that the stockmarkets were not efficient. There is a precise formula relating the spot and future price of two currencies and their interest rates. For some currency pairs, the actual future price varies from the theoretical future price and maintains this variance for a long term trend - therefore the markets are inefficient. 

They have studied these trends with mathematical models developed in-house and discovered statistically significant trends over 4 week periods. The same models show no trends whatsoever in shorter periods, so day trading of currencies cannot produce consistent profits. The same models show no trends at all in the stockmarkets. 

Alder are not currency traders buying and selling currencies throughout the day. They identify long term trends and buy when these trends indicate undervaluation of a currency.

They agree that currency is a zero sum game. However, businesses and central banks are not profit maximizers and are prepared to pay a premium for certainty. This results in inefficiencies. 

There is no catastrophe risk with Alder. They do not use excessive leverage of very small arbitrage situations which might blow up in their face. They buy and sell currencies forward without leverage. ( I am not sure of this).

Alder are fund managers. They do not handle the cash themselves. For example, if you invest in the Friends First Fund, Friends have custody of the money at all times. 

Their management fees are 2% a year + 20% of the excess over 7%. If the fund declines in value during the year, they get no performance fee until the fund has exceeded its previous high. So it's not a case of being rewarded well in the good years and paying no penalty in the bad years. 

The returns so far:
1995…..61%
1996…..21%
1997…..18%
1998…..1%
1999 only traded between January and April and earned 18% 
2000 only traded between October and December and earned 6%
2001…..11% in their Global 10 Fund
        …..18% in their Global 20 Fund - A higher "risk" fund
            ..14% in their Friends First Insight Currency Fund between March and December

<!--EZCODE BOLD START-->*   Questions/What I don't understand*<!--EZCODE BOLD END-->

I have no way of knowing if this past performance is random or not. There seems to be increasing evidence of exploitable trends in the currency markets (according to Shane Whelan in a report for Hibernian Investment Managers). If such trends exist, then Alder <!--EZCODE ITALIC START-->_   could_<!--EZCODE ITALIC END--> be profitably exploiting them.

Even if there has been a trend in the past, there is no guarantee that it will continue. 

There are many thorough reports to show that past performance in the equities markets says nothing about future performance. Do such reports exist for the currency markets? Or do currency fund managers as a group outperform equity managers? Or do currency managers go through good patches only to revert to the mean eventually?

There seems to be no independent verification of Alder's performance and methods.

In the absence of such verification, I looked to see what the Dublin investment community thinks of them and the answer seems to be that they don't think very much of them. They have presented their case to all the fund managers and all the actuarial consultancies around the country and they have very few clients so far. 

What is the real risk of the fund? They say that there is virtually no catastrophe risk - it's not like LTCM whereby a rare, but expected event, will blow them out of the water. But yet the minimum investment is £50,000 and they describe it as a risky investment. 

<!--EZCODE BOLD START-->*   Volatility*<!--EZCODE BOLD END-->
In their presentation they use risk when they mean volatility. And they show that their fund when mixed with an equity fund reduces the volatility. That is of no interest to me as a long term investor. I am only interested in the long term return.  But I appreciate that reducing volatility would be of interest to other investors. 

<!--EZCODE BOLD START-->*   Tentative Conclusions*<!--EZCODE BOLD END-->

Trading currencies is a zero sum game. Outperforming by 25% a year is extraordinary. I don't understand it and so I am still sceptical. I am not saying it's not possible - I just amn't convinced. 

A few years ago I was sceptical of Eagle Star's short term outperformance. If they had presented their case as having some magic ingredient, I wouldn't have believed them then and that scepticism turns out to have been  justified. 

In the end, I would not recommend this fund until I saw some evidence that currency funds can and do consistently outperform the market. I would have to see some independent critical assessment of Alder by someone better qualified to do so. 

There is some marketing information on the fund 

<!--EZCODE ITALIC START-->_ Link formatting corrected by RainyDay_<!--EZCODE ITALIC END-->


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## Rupert Bear (25 Jan 2002)

You did real well, <!--EZCODE ITALIC START-->_ Boss_<!--EZCODE ITALIC END-->,  even a good lunch didn't swing you against your better instincts. 

One quote springs out:<!--EZCODE QUOTE START--><blockquote>*Quote:*<hr> <!--EZCODE ITALIC START-->_ "They agree that currency is a zero sum game. However, businesses and central banks are not profit maximizers and are prepared to pay a premium for certainty. This results in inefficiencies. "_<!--EZCODE ITALIC END--><hr></blockquote><!--EZCODE QUOTE END--> That is completely and deliberately missing the plot.  The price of currencies is decided at the margin by the speculators taking into account all known information.  

Let me explain.  Imagine that <!--EZCODE ITALIC START-->_ Dim_<!--EZCODE ITALIC END--> announced to the world that he was goin' to pay 1$ for very € for the forseeable future.  Total madness of course as the € is only "worth" about $.88.  But the existence of a mad buyer would simply  push the price of the € up to 1$, forget about the fundamentals.  The only way that the speculators can make money here is if they have advance warning or insight into the madness and could buy the € before everybody else found out about the mad buyer.

This is the central argument; it doesn't matter how many irrational traders there are in the currency, in a perfect market the price will settle at a level which yields zero profit despite the existence of irrational traders.
In summary,  a currency fund's only claim to make profits is that it is smarter than the other currency funds. To claim that there are inherent biases within the underlying fundamental suply and demand which allows all the speculators to reap risk free easy pickings is totally unsustainable.
:rupert


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## Brendan Burgess (26 Jan 2002)

Hi Rupert

This was certainly my starting point in my discussions. Currencies must be a perfect market. But Alder came up with a graph showing that there was a significant divergence of forward rates from their theoretical rates. It seems a reasonable argument to me and I don't know enough about currency trading to challenge it. 

Theoretically the currency markets are efficient, but in practice they are not?

Brendan


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## Rupert Bear (26 Jan 2002)

*Re: bullfaeces, Boss*

Are they saying that even if they were pretty mediocre currency traders there is money for old rope here, enough to go round all the currency funds, even the mediocre?

Or, are they saying that they are such smart cookies that they can spot the arbitrages in time before the other currency speculators close off the arbitrage?

This talk of arbitrage in the forward market is absolute faeces. The forward rate of a currency is determined by an absolute formula linking the spot rate, the forward rate and the respective interest rates.  Even the dumbest speadsheet can calculate that, or are they claiming some arbitrage between their spreadsheet facilities and those of the other speculators?

The forward rate is mathematically identical to the spot rate adjusted for interest rate differential.  The fact that these posers shift the ground to talk about discrepancies in forward rates, hoping to blind us all with science, disgusts me to the core and only convinces me of my primary argument; there are no arbitrage opportunites in the currency markets which any particular player, no matter how many Ph D's or Nobel Prizes, can consistently exploit.
:rupert


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## Brendan Burgess (26 Jan 2002)

*Re: bullfaeces, Boss*

Hi Rupert

I should have brought you along to the meeting !

What surprises me is that they have been presenting this around town for the past year or so. I can't find any public review of or challenge to their presentation. But there have been very few people taking them up either.

Brendan


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## Brendan Burgess (27 Jan 2002)

*Re: bullfaeces, Boss*

Hi Rupert

I might be misunderstanding their argument that the market is inefficient. I will follow up on it and report back.

I don't think that they are charlatans - they certainly believe in what they are doing. They may be mistaken and their performance may be due to randomness alone, but they do believe that they have a sustainable edge. 

They wrote an article entitled <!--EZCODE ITALIC START-->_ Reducing effect of FRS17 on your scheme_<!--EZCODE ITALIC END--> in the Irish Pensions Magazine in November 2001. I don't know if these articles are submitted to any form of peer review - I suspect not. But the readership of the magazine would be pretty informed and should have challenged the article. Maybe we will see a challenge in the next edition.

Brendan


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## Rupert Bear (27 Jan 2002)

*Re: Reducing the effect of FRS17*

Well, I can believe that one, <!--EZCODE ITALIC START-->_  Boss_<!--EZCODE ITALIC END-->.  <!--EZCODE ITALIC START-->_  Boots_<!--EZCODE ITALIC END-->, found an even surer way of escaping short term <!--EZCODE ITALIC START-->_  FRS17_<!--EZCODE ITALIC END--> effects, put the lot in cash.:rolleyes  

I cannot dispute that investment in alternative vehicles will reduce short term volatility - its called diversification.

One presumes they are arguing that this reduced volatility is not at the expense of reduced performance.

Looking back over this thread I noticed that they claimed to make 61% in 1995.  
What?; from currency trading alone?!  
Now, even with luck, that <!--EZCODE BOLD START-->*  is*<!--EZCODE BOLD END--> impressive.  Can they give us any insights into broadly what went so spectacularly right for them in 1995?  I am sure that won't reveal any secrets but might give the doubters like me (and you, <!--EZCODE ITALIC START-->_  Boss_<!--EZCODE ITALIC END-->) some sense of how they make money out of a zero sum game.
:rupert


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## Homer (28 Jan 2002)

*Re: Reducing the effect of FRS17*

The only sure way of reducing FRS17 volatily (while maintaining a defined benefit pension scheme) is to invest in fully matched assets. This implies investment in AA corporate bonds of suitable term and currency. This is what Boots did.

As to whether the arguments in the article Brendan refers to stand up, I wouldn't necessarily agree that readers of the magazine will automatically challenge anything that doesn't stand up. There may well be a response, or people may be too busy preparing FRS17 returns to study the article in detail, or the wording may be too vague to allow direct criticism. 

For example, the article probably includes a statement along the lines that increasing diversification will reduce volatility. That's hardly rocket science, but most people would agree with the statement. Whether using currency funds in conjunction with equities can significantly reduce volatility without also significantly reducing expected returns remains to be proven, and I would be among those who would be highly sceptical of this assertion.

Homer


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## Mithrandir (29 Jan 2002)

*Alder Capital*

Listen folks, what's the point in Alder replying if we're going to lash into them. I stll don't see why currency trading which is a simply huge trading area can be described variously as 'posers' and using 'absolute faeces'. What of the Central Bank authority provided?

This certainly never aroused such comment here before. Perhaps its something to do with it being a local firm. But it's a little difficult, and somewhat embarrassing to ask a commercially busy firm to engage in this standard of debate. If I was them I wouldn't bother, seriously. If they've got something that works, business and performance on the scoreboard is where I'd concentrate. I'm sorry the thing twisted so.


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## Rupert Bear (29 Jan 2002)

*Re: Mith's Censure*

<!--EZCODE ITALIC START-->_      Mith_<!--EZCODE ITALIC END-->, it is clear from an earlier posting that you see some merit in these currency fund things and may even have advised folk into them (clearly in good faith).

However, it is a little rich for you, of all people, to sanctimoniously censure the subsequent criticism of the concept for the colour of it's language and it's lack of patriotism.

You are well noted for favouring foreign players over the domestic market.  And when you decide you are against something (which others in good faith support) the colour of your satirical metaphor is of Van Goghian proportions.
<!--EZCODE QUOTE START--><blockquote>*Quote:*<hr>     "If they've got something that works, business and performance on the scoreboard is where I'd concentrate."<hr></blockquote><!--EZCODE QUOTE END--> I didn't think you were a big supporter of past performance.

The <!--EZCODE ITALIC START-->_   Boss_<!--EZCODE ITALIC END--> reports:<!--EZCODE QUOTE START--><blockquote>*Quote:*<hr>   <!--EZCODE BOLD START-->*   <!--EZCODE ITALIC START-->   "Their management fees are 2% a year + 20% of the excess over 7%." <!--EZCODE ITALIC END-->*<!--EZCODE BOLD END--><hr></blockquote><!--EZCODE QUOTE END--> Would these charges pass the "saverkite" test?
:rupert


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## Brendan Burgess (29 Jan 2002)

*Re: Mith's Censure*

Lads(?) 

This is a very interesting and important subject which I am anxious to get to the bottom of. Please don't vere off into a slagging match of each other or of Alder.

Alder claims a fantastic performance. It's only right that these claims be challenged and defended. 

I can find no independent assessment of Alder, so this debate on Askaboutmoney fulfills an important purpose. 

I can find no informed debate on currency funds anywhere on the web, but I am still looking. 

Maybe Alder has a reliable, consistently outperforming strategy or maybe they are being fooled by randomness. The debate is still open as far as I am concerned. I think it is only right to remain sceptical and withhold investing until there is some genuine evidence to the contrary.

I know the point you are making about them being Irish. How could we Paddys come up with something as brilliant as this. For my part, if an American firm were making the claims they are making, I would just put the phone down. I have met the lads and I know others who know them - they are not some boiler room operation; they don't have a criminal record for scamming people; they are undoubtedly very clever; but that doesn't mean that they are not being fooled by randomness.

Brendan

Brendan


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## Mithrandir (29 Jan 2002)

*Encouraging Debate*

Rupert, and Brendan, I think you missed my point. 

Rupert clearly is a highly informed fellow. Brendan has met Alder. These are very important ingrediants, to any informed debate. But that's not the point. I was simply being practical.

 If we are to secure AAM as a place where the likes of Alder and others will be encouraged to participate, we need to create the environment for doing so. I've posted many times before on the annonymous nature of AAM which is both a strength and a weakness. On the weakness side it can turn off participants, who could otherwise share important information, because they feel they're walking into a one sided bear trap, where they're visible and others aren't.

We appeared to be going that old road again. I didn't mean, and I opologise if it sounded sanctimonious. It's just I know how it feels, and if I was Alder I might consider just ignoring AAM altogether. That's all. Please don't read anything else into it.


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## Rupert Bear (29 Jan 2002)

*Re: Getting the debate back on track*

Sorry, <!--EZCODE ITALIC START-->_ Boss_<!--EZCODE ITALIC END-->, lost the run of myself. 

I am still somewhat confused about the nature of this fund, which, <!--EZCODE BOLD START-->* honestly*<!--EZCODE BOLD END-->, I had never heard about until the opening of this topic.

You report:<!--EZCODE QUOTE START--><blockquote>*Quote:*<hr> <!--EZCODE BOLD START-->* <!--EZCODE ITALIC START--> "The returns so far:
1995…..61%
1996…..21%
1997…..18%
1998…..1%
1999 only traded between January and April and earned 18% 
2000 only traded between October and December and earned 6%"<!--EZCODE ITALIC END-->*<!--EZCODE BOLD END--><hr></blockquote><!--EZCODE QUOTE END-->A couple of questions spring to mind.  As already alluded to, why the spectacular results in 1995 from mere currency trading?  More puzzling, what sort of beast is this that can turn itself off and on through 1999/2000 and then finally off for 2001. 

You also report:<!--EZCODE QUOTE START--><blockquote>*Quote:*<hr> <!--EZCODE BOLD START-->* <!--EZCODE ITALIC START--> "Their management fees are 2% a year + 20% of the excess over 7%. If the fund declines in value during the year, they get no performance fee until the fund has exceeded its previous high. So it's not a case of being rewarded well in the good years and paying no penalty in the bad years."<!--EZCODE ITALIC END-->*<!--EZCODE BOLD END--><hr></blockquote><!--EZCODE QUOTE END-->  Let's see now, that means they made approximately 16% :eek  management fees in 1995, 6% in 1996, over 5% in 1997, only 2% in 1998, 5% for three months trading in 1999, and back to only 2% for three months in 2000, and since???

Now, all my suspicions about these things start to come to the fore.  During the good (lucky?) times, very rich pickings indeed for the managers.  Then when the tide (luck?) turns, time to pack the bags.  The fee structure is very asymmetrical.  It encourages making high bets and no real pain when it goes wrong.
:rupert


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## Dynamo (29 Jan 2002)

*Currencies*

Hi Folks,

Meant to post on this yesterday but didn't get a chance, and I see the debate has moved on (well, maybe not).

Back to basics. Rupert, you're right in your description of the relationship between spot and forward rates. No exploitable opportunities there.

However, the currency players disagree about the zero-sum game. Yes, it's a zero-sum game in the sense that one participant's profits inevitably equate to another's losses. But it's not a zero-sum game in the sense that not all participants have the same objectives, therefore all can be happy with an outcome even if someone has apparently "lost".

How does this work in practice ? Not in the way you suggest. Even when they're defending currencies, Central Banks don't stand up and announce that they are buyers of a given currency at any price for any period. It's a lot more subtle than that.

Let's look at Ryanair's recent announcement. Micko has effectively announced that he's a buyer of $5 billion (presumably funded by €) in the foreseeable future. He has a $/€ rate at which the deal works, and will buy the $ at or better than that rate. He's seeking as much price certainty as possible, and doesn't mind giving some profit to someone else to get it.

The currency players hire smart people to analyse currency trading and investment flow data and derive expectations as to future prices. Factor in the Central Banks, which as I have said before are consistent losers (occasionally massively so), and the fact that currencies display strong momentum trends (perhaps because desired-hedgers increasingly get flushed out as the price moves against them0, and you have a background in which I can accept that smart analysts can make money in currency markets, as long as they account for a relatively small portion of that market. I've attached a link to an article by Neil Record of Record Treasury Management where he estimates currency overlay managers to be only around 1% of the total currency market - the opposite to Brendan's supposition on the make-up of the market, by the way.

It's not a free lunch. It may be highly risky. It requires expertise and a lot of analysis. You can lose money. But it may be a legitimate investment strategy for the right type of client. I have seen it in action in the institutional world in the US, where large pension funds hire currency overlay managers to squeeze out very small levels of return in a highly risk-controlled fashion. Alder is aiming at the retail world, via a hedge fund, and must be taking far riskier strategies to generate the returns they have got. If they do return to AAM, I'd like them to focus on the risks they take within the portfolio, and how precisely they have generated the high returns.

As for the fees, they're typical of the hedge fund world, and (as I have argued in a different context) you get what you pay for. Hedge funds are an in-demand area and hence can (and do) charge a very high price for their services. If you don't like the price, you don't have to play.


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## Rupert Bear (29 Jan 2002)

*Re: At Best a Plus 1.9% per annum game*

Very interesting paper, <!--EZCODE ITALIC START-->_  Dynamo_<!--EZCODE ITALIC END-->.  It is almost as if <!--EZCODE ITALIC START-->_  Neil Record_<!--EZCODE ITALIC END--> was following our thread. (Easy read, <!--EZCODE ITALIC START-->_  Boss_<!--EZCODE ITALIC END-->, I recommend it to you.)

His opinion, and he admits that it is just an opinion, appears to me to be that every day the <!--EZCODE ITALIC START-->_  Ryanairs_<!--EZCODE ITALIC END--> of this world want to close off a big currency transaction and not too fussy about perfect price.  My problem with this argument as you had put it. <!--EZCODE ITALIC START-->_  Dynamo_<!--EZCODE ITALIC END-->, was that in a perfect market (and as <!--EZCODE ITALIC START-->_  Neil_<!--EZCODE ITALIC END--> himself says, none more perfect than the currency market) all the speculators would know about it and quickly close off any arbitrage oppportunity.  <!--EZCODE ITALIC START-->_  Neil's_<!--EZCODE ITALIC END--> rebuttal of this efficient market hypothesis seems to be to accept that while everybody will know about the forced trader, only the "overly managers" will have the nerve to exploit it.

Of particular interest in the paper was the survey analysis which was approached in what appears a very objective manner.  In particular, he alludes to the possibility of "survivor bias", a particular hobby horse of mine.

Subject to caveats such as "survivor bias" and 3 out of 17 declining to take part in the survey, he finds a statistically significant added value of 1.9% per annum from these "currency overlay" managers.

Now let's return to the Topic.  If all <!--EZCODE ITALIC START-->_ Neil_<!--EZCODE ITALIC END--> can point to in a caveated survey of the top currency overly managers is an added value of 1.9% p.a., I ask the following questions.

<!--EZCODE BOLD START-->*  HOW IN THE NAME OF HECK DID ALDER MAKE 61% IN 1995 AND HOW CAN CURRENCY PLAYERS AS RULE HAVE THE NECK TO CHARGE 2% + 20% FOR WHAT AT BEST IS A PLUS 1.9% GAME??"*<!--EZCODE BOLD END-->:eek


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## Dynamo (29 Jan 2002)

*Currencies*

Hi Rupert,

Glad you enjoyed the Neil Record paper. Just a quick response on a couple of points.

1. I assume (though it's not stated) that the 1.9% added value is net of fees.
2. I'd suggest that not many people have the ability, the information, the motivation, the resources, and the nerve (rather than just the latter) to exploit the inefficiences. Your choice of words suggests that it's easy but risky; I'm inclined to think it's not easy and it's risky.
3. Record's firm is an overlay manager as I described it - aiming for small but consistent value added over a tight risk-controlling benchmark. Alder is a hedge fund with a much riskier (and potentially much higher return) strategy.

But your question is valid. And it's the one I would also put to Alder, if slightly more politely.  <!--EZCODE ITALIC START-->_ What are the risks they take within the portfolio, and how precisely have they generated the high returns._<!--EZCODE ITALIC END--> Does anyone have any data on other currency hedge funds, so that we might compare a sample of similar managers ?


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## corncrake (29 Jan 2002)

*Alder*

Best debate on a real financial topic for a long time- some quality contributions.

I saw the Alder guys present some time back and found them hugely impressive.As someone with considerable experience in the fund management business I feel equipped to comment that they really know their subject inside out and we did give their proposition serious consideration.

Having met several outfits engaged in the Hedge business( and make no mistake Alder is a hedge fund) here are a few observations of my own ;

-trading is a zero sum game 

-the assymetrical nature of the fees should rightly turn off investors

- yes,there is a real problem with past performance because of the lack of verification and the well-observed survivor bias

According to an article in the FT (12/12/01),work done at Reading University shows that 59.5% of hedge funds survived to their 5th anniversary.
It also showed that the rate of attrition was increasing with 12.3% of funds failing to reach their 1st anniversary.

If the under-performing funds folded tent the figures for pension fund performances would look very different !

There has been a lot of analysis presented to Conferences etc which shows an attractive risk/reward trade-off based on the lack of correlation between currencies or other 'alternatives' and 'mainstream' assets.In my opinion this is fundamentally flawed because the reward numbers are not credible.

I want to state that I am not questioning the veracity of the performances claimed by the Alder guys, with whom we were highly impressed.


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## Rupert Bear (30 Jan 2002)

*Re: A Great Debate that is actually shedding some light*

<!--EZCODE ITALIC START-->_ Boss_<!--EZCODE ITALIC END-->, <!--EZCODE ITALIC START-->_ Corncrake's_<!--EZCODE ITALIC END--> contribution and the link provided by <!--EZCODE ITALIC START-->_ Dynamo_<!--EZCODE ITALIC END--> have certainly made my humble participation in this GD very worthwhile for me.

Let me reiterate that I never heard of <!--EZCODE ITALIC START-->_ Alder_<!--EZCODE ITALIC END--> before this GD and I do not know the principals.  However, I am perfectly prepared to accept the glowing character references bestowed upon them by yourself and others.  I have absolutely no doubt that they are very honourable, smart guys who believe they have a formula and who have got the formula to work (except 1999 to 2001 still look patchy to me).  Hence I regret any offence which some of my earlier outpourings may have caused.

Where am I now?

I accept that there may be slivers of inefficiency in the currency markets and given their near perfection and liquidity, ironically that might allow such slivers to be exploited for profit.

However whilst the game is above zero for those who have the required know-how it is only very slightly above zero as that report shows.  Excessive returns will require excessive risk taking and therefore luck.

I believe the fee structures in this context of 2%+20% are inappropriately high and not conducive to a convergence of the client's and the manager's ineterests.

But the most enlightening revelation of all is this "survivor bias" factor which must be explaining why these Hedge Funds all look so good.  Of course they look good.  As soon as the make-up wears off in this game your thrown off the stage.

I think the increasing appearance of and the misleading  presentation of Hedge Funds in the retail sector (the big boys can look after themselves) is bound to backfire, just a matter of time.  
:rupert


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## Brendan Burgess (30 Jan 2002)

*Re: A Great Debate that is actually shedding some light*

Two quick points

<!--EZCODE BOLD START-->* What happened in 1999 and 2000?*<!--EZCODE BOLD END-->

The two principals were employed by Gaiacorp where Mark Caslin developed this currency model. He left in 1999 and set up Alder in about Sept 2000.

<!--EZCODE BOLD START-->* The fee structure*<!--EZCODE BOLD END-->

Yes the fee structure does encourage them to take risks. But it is a hurdle fee structure. Each year the hurdle is raised another 7%. In other words, if the fund drops by 10% this year, they  need to achieve 17% next year before they earn their performance fee. 

I had assumed that each year started afresh, so that a loss of 10% would not cost them anything at all.

I must reread some of the new comments and Neil Records paper to see can I get to grips with them.


Mith said "Rupert clearly is a highly informed fellow. Brendan has met Alder" ( he is not highly informed)
Rupert said"Easy read, Boss" ( in other words - even you would understand it!)

When I said to lay off the insults - I didn't mean to stop insulting each other and to insult me instead!

Brendan


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## Rupert Bear (30 Jan 2002)

*Re: Boss you really oughta practice smiling*

Now don't get all sensitive <!--EZCODE ITALIC START-->_   Boss_<!--EZCODE ITALIC END-->. I think you understand more of this than you pretend. 

I have to say I am now completely confused, what was that performance of 61% in 1995 referring to, if <!--EZCODE ITALIC START-->_  Alder_<!--EZCODE ITALIC END--> was launched only recently?

<!--EZCODE ITALIC START-->_  Boss_<!--EZCODE ITALIC END-->, Management fees of 16% if things go well and 2% guaranteed if they go badly are not in the consumer's interest.

I really do think this Hedge Fund thing is <!--EZCODE BOLD START-->*  dangerous*<!--EZCODE BOLD END--> and there is enough informed commentary in this thread for AAM to take a lead in stopping this virus.

It promises double digit returns come what may, remember <!--EZCODE BOLD START-->*  TINSTAAFL*<!--EZCODE BOLD END-->.

Past performance is hugely tilted by the  "survivor bias" effect.

It sounds so awfully sophisticated that even such consumer champions as <!--EZCODE ITALIC START-->_  Mith_<!--EZCODE ITALIC END--> are fooled.

The charging structure is dreadfully tilted towards the managers taking wild punts, if they win "bob's your uncle", they clean up, if they lose, take the 2% and try again under a different guise.

The objective research (and that was form a currency trader) available to AAM suggested that currency arbitrage opportunities amounts to no more than 1.9% per annum.  Subtract retail charging structures and this is a complete no-no.

Verdict - <!--EZCODE BOLD START-->*  Guilty as Charged.*<!--EZCODE BOLD END-->:rolleyes  
:rupert


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## Ludwig (17 Mar 2002)

*Hedge Funds*

From my report:<!--EZCODE QUOTE START--><blockquote>*Quote:*<hr> <!--EZCODE ITALIC START-->_ <!--EZCODE BOLD START-->* "His trading became essentially a hedge-fund operation.  But one lone trader on Baltimore has no competitive advantage  in this highly competitive, sophisticated market..."*<!--EZCODE BOLD END-->_<!--EZCODE ITALIC END--><hr></blockquote><!--EZCODE QUOTE END-->

Let's face it, Hedge Funds are a zero-sum con.:rolleyes


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