Alder Capital – the best performing unit linked fund?

C

Cynic

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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
 
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...
 
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?
 
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
 
Interesting Views

Rupert, that was interesting. Perhaps I need to dig a little more. What would you recommend?
 
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
 
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?
 
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
 
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
 
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). ;)
 
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.
 
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
 
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?
 
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! ;) )
 
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.
 
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-->.;)
 
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
 
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.
 
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
 
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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