AFX Index December Update: Flat Year for Currency Trend Followers …..

Passive currency indices do not reflect any of the money management skills necessary to generate profit out of the Foreign Exchange market. Evidently there is no value in holding a long (or short) position in any currency over the very long term. For this reason passive currency benchmarks fail to adequately describe the performance of currency funds because they do not have an embedded timing process to imitate the short/long currency positions that an active manager would take. For that reason correlation between passive currency indices and currency managers peer group indices tends to be low.

The AFX, aims to replicate the risk/return profile of the average currency manager by using the returns of technical trading rules, namely trend following trading rules. The index was designed by Lequeux & Acar (1998). The timing embedded in the index relies on the buy/sell signals generated by three moving averages. So as to cover a broad spectrum of time horizons the ex-ante statistical properties of technical indicators were used to build the index on the basis of ex-ante measurable criteria of risk reduction and transaction costs. Finally the index uses a weighting scheme derived from the estimated turnover in currency market as reported by the triennial survey on foreign exchange turnover conducted by the Bank for International Settlements. The index is calculated gross of any fee or risk free income and as such express the typical directional market opportunity that was available in G10 FX.

A full description of the index can be found in : Lequeux, P. and Acar, E. (1998) “A Dynamic Benchmark for Managed currencies Funds”, European Journal of Finance Vol. 4.

The historical returns of the AFX Index can be downloaded by through the following link: AFX Historical data

plot of chunk risk_profile

**Summary Performance Statistics

##                                  AFX
## Annualized Return               2.99
## Annualized Standard Deviation   6.79
## Annualized Sharpe Ratio (Rf=0%) 0.44

Drawdowns Table

##          From              Trough         To  Depth Length To Trough
## 1  2015-04-30 2016-09-30 01:00:00       <NA> -15.21        22     22
## 2  2010-11-30 2014-06-30 00:00:00 2015-01-30 -11.48        51     51
## 3  2004-01-30 2004-09-30 00:00:00 2008-10-31 -10.76        58     58
## 4  1993-05-28 1995-01-31 00:00:00 1996-01-31  -7.86        33     33
## 5  1988-01-29 1988-04-29 00:00:00 1988-11-30  -7.79        11     11
## 6  1991-04-30 1991-08-30 00:00:00 1991-12-31  -7.17         9      9
## 7  2009-01-30 2009-04-30 00:00:00 2010-05-31  -6.26        17     17
## 8  1992-01-31 1992-04-30 00:00:00 1992-07-31  -5.77         7      7
## 9  2002-07-31 2002-11-29 00:00:00 2003-05-30  -5.68        11     11
## 10 1989-06-30 1989-10-31 00:00:00 1990-07-31  -5.58        14     14
##    Recovery
## 1        18
## 2        44
## 3         9
## 4        21
## 5         4
## 6         5
## 7         4
## 8         4
## 9         5
## 10        5

Monthly Returns

##       Jan  Feb  Mar  Apr  May  Jun  Jul  Aug  Sep  Oct  Nov  Dec YEARLY
## 1984 -0.6 -0.7 -0.7  0.0  0.8  1.4  4.1 -1.7  3.9 -0.9  0.9  1.9    8.5
## 1985  1.5  4.0 -1.5 -2.3 -0.4 -0.3  6.7 -1.5 -1.5  2.1  3.3  0.0   10.1
## 1986  1.4  5.0 -1.3  2.2 -1.1  0.3  3.7  0.1 -1.3  1.0 -0.9  0.8    9.9
## 1987  3.2  0.1  2.3  1.7 -1.6 -1.9  1.7 -0.1 -0.5 -0.2  4.7  5.0   14.3
## 1988 -5.8 -0.3 -0.2 -1.6  1.3  4.2  1.8  0.7 -1.5  0.9  3.1 -2.9   -0.2
## 1989  3.1 -2.5  3.1 -0.3  5.6 -0.5 -1.6 -0.9 -1.6 -1.1  0.8  2.2    6.4
## 1990 -0.4  0.5  0.7 -0.1  0.1 -1.2  3.8  1.1 -0.2  3.3 -0.6 -1.4    5.7
## 1991 -1.8 -1.1  7.9 -1.8 -0.9  2.3 -2.7 -4.2  3.6 -1.6  1.9  5.3    7.0
## 1992 -4.5 -1.0  0.8 -1.1  0.5  3.8  1.7  3.7 -0.6 -0.7  1.7 -0.7    3.6
## 1993 -2.8  2.0  0.5  2.6 -0.1 -1.2 -0.5 -3.3  0.1  0.0 -0.2 -0.4   -3.3
## 1994 -1.5  0.3  1.4 -0.4 -0.9  2.9 -1.1 -1.5 -0.2  1.8 -1.2 -1.1   -1.5
## 1995 -0.8  1.7  6.5  0.2 -3.8 -2.0 -0.5  4.9 -1.1  0.7 -0.9 -0.1    4.7
## 1996  3.3 -1.8  0.6  2.0  0.4  0.3 -0.1 -1.0  0.8  1.8  0.2  1.4    7.9
## 1997  4.0  1.3 -0.3  1.3 -2.6  0.7  2.3 -0.9 -0.4  0.1  1.5  0.1    7.2
## 1998 -0.7 -2.1  2.6 -1.3  1.5 -0.5 -0.8 -1.9  0.9  4.7 -2.5  0.1    0.1
## 1999 -0.4  0.7  0.7  0.6  0.7 -0.5 -0.5 -0.8  0.2 -0.8  2.4 -0.5    1.8
## 2000  1.8  0.8 -0.7  1.4 -1.1 -1.7 -0.2  1.9 -0.7  2.0 -0.6  4.4    7.3
## 2001 -0.3 -1.4  2.6 -2.1  0.8 -0.5 -1.0  1.8 -0.9 -0.6 -0.5  0.3   -2.0
## 2002  1.3 -1.9 -1.3  0.3  2.6  4.7 -0.4 -1.5 -1.7 -1.6 -0.6  2.8    2.8
## 2003  1.2 -0.5 -0.5  0.1  2.9 -1.9 -1.1  0.7  0.7  0.3  0.7  3.0    5.7
## 2004 -0.5 -0.4 -1.0 -0.7 -1.0 -1.8 -1.3 -3.0 -1.5  2.0  3.3  0.3   -5.7
## 2005 -2.7 -0.4  0.0 -0.2  2.6  2.2  0.2 -1.6  0.6  0.3  1.6 -1.7    0.7
## 2006 -1.4 -0.9 -1.6  1.9  1.2 -1.1 -0.6  0.6 -0.1 -0.2  1.9 -0.5   -0.8
## 2007 -0.1 -0.9 -0.8  1.2 -0.4  0.1  0.3 -1.0  1.6  0.6  0.6 -1.3   -0.3
## 2008  0.7  0.9  2.8 -2.5 -1.5 -1.9 -0.7  4.2 -0.9  8.8  1.5  0.3   11.5
## 2009 -1.1 -0.4 -2.2 -2.8  4.5 -0.7 -0.6 -0.7  1.6 -0.8  0.8 -0.7   -3.0
## 2010  0.7  1.3  0.1 -0.3  3.1 -0.7  0.7  0.1  1.1  1.4 -0.7 -1.7    5.0
## 2011 -1.3  0.2  0.3  3.0 -3.2 -1.6 -0.2 -2.9  3.2 -4.1 -0.2  2.0   -4.8
## 2012 -0.9  0.8 -0.6 -1.2  3.3 -3.3  0.8 -1.1  1.2  0.4 -0.1  2.2    1.5
## 2013  2.1 -0.2  0.7 -1.8 -0.5 -2.6 -0.4 -1.5  1.5 -0.5  0.3  1.8   -1.2
## 2014 -2.6  0.2 -0.9 -0.9 -0.2 -0.1  0.5  1.4  3.5  0.7  2.5  1.4    5.5
## 2015  2.5 -0.3  1.9 -1.3 -1.0 -2.5 -0.7 -1.2 -0.5 -1.5  2.3 -3.4   -5.6
## 2016 -0.7  0.6 -0.6  0.6 -1.3 -1.3 -1.1 -0.9 -1.9  1.4  3.6  1.3   -0.3

The AFX is positively correlated to main peer group indices highlighting that currency managers are typically directional in their investment style. The below charts shows the 24-month rolling correlation of the AFX with the BTOP FX Index .

plot of chunk rolling_correl

If you need more information or have questions about the above, feel free to contact me at pollux@argonautae.com