I have written quite a few times about the DB Currency Harvest Fund (DBV) in the past and even traded it personally a few months ago. The fund goes long the three highest yielding currencies in the G-10 and short the three lowest yielding G-10 currencies; a carry trade of sorts.
On May 10 the Bank of England raised its Fed Fund equivalent rate to 5.5% which is higher than the Fed's 5.25% which means that the US dollar is no longer one of the longs.
Now that the fund is not long* the US dollar I am thinking about going back in and possibly buying for clients as well. The carry trade is not riskless but the fund is short more than just the yen, so while DBV would feel any yen dislocation it might not be as bad as pure yen.
I think the proper weight might be 2% of a portfolio which is small but again the strategy underlying the fund is risky to a point; not one-drug-biotech risky but still.
I enjoy, personally, exploring these types of strategies and adding them into a portfolio does add value, IMO, but it seems that do-it-yourselfers invest way too much in each of these alternative-ish investment products.
Please, moderation.
* The fund does have dollar exposure in that it owns mostly treasuries, that pay yield, and uses futures contracts to get long and short.
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13 comments:
If you're worried about the Yen carry trade why not go long DBV and purchase a proportionate share of FXY to essentially neutralize the short Yen futures??? Not a perfect hedge but it would seem to decrease the risk.
clearly valid.
If I am a buyer (don't know yet) I am thinking something like 2%. Hedging a small fraction of a 2% position may not be economical.
Agreed, 1/6th of 2% (~33bp) is probably not worth the time. Just a thought.
I do appreciate your willingness to explore these alternate strategies and products. I would be interested to hear more thoughts about the Covered Call ETFs and/or your use of preferreds and convertibles.
This is one of those areas where I am unable to clearly map a cause to a desired effect. At least with the Tunisian Fund, I can watch the Dinar vs. the Dollar or the S&P rating of their bonds. DBV seems, to me at least, to have to many variables associated with it.
Roger,
Interesting update on DBV.
Have owned since late October, obviously took some heat at the end of November and during the February correction, but in general has been a very nice holding.
No reason that only hedge funds should participate in the carry trade.
many variables? yes
in addition to the six currencies within there is the visibility for future changes. GBP replacing USD has been visible for a while.
Norway is raising rates and will get close to 5% either way and while I doubt it will exceed 5.5% it could and so at some point as it gets close DBV holders will have to think about that too.
Linda P, are you saying you own it personally or for clients?
If clients, do you find that any of them have asked what it is and if so do you find they can understand it?
TIA
I'm curious whether there has been much comment on DBV from the vantage point of efficient market theory and the academic community. This fund is apparently premised on the idea of exploiting a known, persistent, inefficiency in the currency futures markets...Though I've never been much of a believer in efficient market theory, I'm still kind of surprised that something this simple should continue to work.
Josh,
I'm not sure if it is an inefficiency. It could be of course but...
Some amount of forex trade comes from businesses managing their treasuries and then some amount (probably most?) is done by investors/speculators.
I first heard about the carry trade in the 1990's. Borrow in yen and buy US treasuries with a seven handle. I never heard about it being done with other currencies on the long end but I was less in tune with forex then.
The data on the currency harvest index goes back a long way, long enough for me to think it is more of a fundamental thing.
an inefficiency might better describe the Malaysian ringgit. It just recently was allowed to trade. A lack of supply of ringgit in the capital market world seems more like an inefficiency but who knows?
The currency futures traders are wagering large sums of money to predict the future exchange rates. So if there is a predictable drift in the exchange (from low interest rate countries towards high interest rate ones) then that is something they should be factoring into their bets. Of course it is probably a much slower drift than the moves they ordinarily try to capture, but it seems as if it should still theoretically be factored in already if the market were truly efficient.
The volatility of DBV is less than the market. And I like the fact that it is more than one currency pair.
However I do not know the downside risks, such as how far and fast does this product go down in a bear market?
I like owning DBV so far, with its low volatility, compared to the market.
I just do not know how this product behaves in a bear market. Would it increase its rate down? Can one of the currencies used in DBV fall suddenly and deep? I certainly do not know.
here is index performance going back to 94. Worse year was -1.68.
The main thing I like about this fund is (at least i thought) you know what you are getting, upfront. May not work in the future, but to me, the track record of this known system is impressive
1994 12.15 1.32
1995 8.56 37.59
1996 33.95 22.96
1997 8.01 33.37
1998 -1.68 28.58
1999 15.12 21.04
2000 11.11 -9.10
2001 14.55 -11.89
2002 17.68 -22.10
2003 19.55 28.68
2004 8.18 10.88
2005 14.23 4.90
2006 5.96 15.79
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