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Systematic FX returns can be extracted from the market, says Deutsche Bank


The currency markets are not traditionally regarded as the place to find ongoing market returns or beta, but research performed by Deutsche Bank has shown that with the implementation of sophisticated alternative investment strategies, systematic FX returns can be extracted from the market.

The Deutsche Bank Currency Returns Index, which db x-trackers launched as an exchange-traded fund on the London Stock Exchange in August, is designed to harness those FX beta returns.

Analysis of the DBCR’s historical performance suggests that over the long term an allocation to the index should outperform an equivalent investment in global bonds or equities on a risk-adjusted basis, while remaining largely de-correlated with regular investment markets.

Deutsche Bank says the nature of the forex market is such that there is a relatively small number of market speculators compared with the much larger universe of participants trading because they have to meet certain business or strategic objectives – hedgers, import and export firms keeping their accounts in check, portfolio re-balancers and so on.

The existence of persistent beta in the currency markets is attributable to the fact that those market participants not speculating effectively pay a liquidity premium to trade, which leads to the presence of systematic returns.

Beta returns – those liquidity premiums – have therefore always been present in the currency markets. They are not obvious and finding ways to monetise those returns has not been easy.

Deutsche Bank says the DBCR Index works by seeking to take advantage of positive net yield, positive momentum and undervaluation in currency rates. Specifically, it combines the performance of three of the most common FX trading strategies – carry, momentum and valuation.

Deutsche Bank has designed proprietary standalone indices to harness these strategies – the DB Carry Index, DB Momentum Index and DB Valuation Index – and it is the equally-weighted combination of these that constitutes the DBCR Index.

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