The Cambridge Strategy Foreign Exchange Overlay

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The Cambridge StrategyForeign Exchange Overlay

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• A Systematic FX Trading System

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Risk Disclaimer Some services are not available
to private inexperienced investors. Services may
also not be available to certain investors due to
regulatory or other constraints either in the UK
or elsewhere. The information contained herein is
not targeted at the residents of any particular
country and is not intended for distribution to,
or use by, any person in any country or
jurisdiction where such distribution or use would
be contrary to local law or regulatory
requirements. Information contained herein may be
subject to change without notice. Investments in
securities of financial instruments (which
include contracts for differences, futures,
options spot and forward foreign exchange and
off-exchange contracts) can fluctuate in value
and you should be aware that you may not realise
the initial amount invested and may incur
additional liabilities. As investments in
securities or financial instruments may entail
above average risks you should carefully consider
whether your financial circumstances permit you
to invest and if necessary seek the advice of an
independent financial adviser. Foreign exchange
denominated securities and financial instruments
are subject to fluctuations in exchange rates
that may have a positive or negative effect on
there value, price or income derived from the
securities or financial instrument concerned.
Past performance should not be taken as a guide
to future performance. You are advised that
Arcanum Investment Management is unable to
provide advice as to tax consequences of a
particular investment or investment strategy and
you are advised to seek professional advice in
this respect. Arcanum Investment Management LTD
is authorised and regulated by the Financial
Services Authority. This document is not a
solicitation or instruction to invest. It is
provided for information purposes only.
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• A systematic approach to exploit opportunities in
  the currency market using a diversified mix of
  currencies and trading time horizons that
  encapsulates the extensive experience of the
  team.
• The system exploits a statistical edge that is
  then expressed in the portfolio after being
  adjusted for risk.
• The leverage in the portfolio is optimised by
  using a proprietary risk and money management
  system.

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CONTENTS Company Objectives Investment
Process Risk Management Implementation
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COMPANY
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The Cambridge Strategy Trading Team Pete
Henricks Principal Former CEO,
Alliance Capital LLP, Asia Russell
Thompson Principal Former Head of
Trading for AIG Trading, Asia Andrew
Bent Principal Former Head of
Asian Currency Trading , HSBC, Hong Kong
Company Objectives
Investment Risk
Implementation Appendices

Process Management
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• Authorised and Regulated by the Financial
  Services Authority
• 107,000,000 of Assets under Management in our FX
  Alpha Programme
• 20,000,000 of Assets under Management in an FX
  Currency Overlay Programme
• 250,000,000 of Assets under Management Under
  Advice of FX Currency Overlay Programme

Company Objectives
Investment Risk
Implementation Appendices

Process Management
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OBJECTIVES
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Risk Mitigation Naked Currency Exposure Can Add
Significant Volatility to Underlying Currency
Returns
Company Objectives
Investment Risk
Implementation Appendices

Process Management
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Currency Risk represents around 14 of
International Equities Risk and 64 of
International Bonds Risk
Company Objectives
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Implementation Appendices

Process Management
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• Excess Returns
• Despite liquidity, the currency markets have
  inherent inefficiencies that can be modelled and
  exploited for Currency Alpha.

Company Objectives
Investment Risk
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Process Management
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The alternatives
Company Objectives
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Implementation Appendices

Process Management
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Active Currency Overlay

• Specialist focus on existing currency risk
  embedded in an international portfolio of
  equities or bonds
• An active currency overlay programme can seek to
  reduce risk and/or add returns within client
  defined objectives and constraints
• Hammond Black offers a fully customisable
  currency overlay programme that uses systematic
  indicators to create excess alpha

Company Objectives
Investment Risk
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Process Management
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Realities and Perceptions of Risk The Cambridge
Strategy Annualised Risk has not Exceeded
Traditional Asset Classes
Company Objectives
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Implementation Appendices

Process Management
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INVESTMENT PROCESS
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• A proprietary algorithm is used to identify
  opportunities in the major currencies.
• Systematic monitoring of currencies over three
  distinct strategies, and multiple time frames.
  This process identifies trades in trending and
  congested markets
  
• Trades are executed by a member of the Core Team
• Finite risk exposures through a strict control
  mechanism that is in place at all times

Company Objectives
Investment Risk
Implementation Appendices

Process Management
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Company Objectives
Investment Risk
Implementation Appendices

Process Management
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• Leverage is strictly controlled by managing risk
  at the Trade Level.
• Each trade assumes identical risk
  characteristics. Ruin Strategy is employed to
  focus on maximizing gains, and limiting losses,
  and link portfolio level risk to trade level
  risk.

Company Objectives
Investment Risk
Performance Appendices

Process Management
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RISK MANAGEMENT
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• Take profit and stop loss levels are set before
  trade execution
• Stop loss levels are immutable and a determinate
  of position size
• Each trade endeavours to have the same risk
  characteristics
• VAR is monitored in real-time at both individual
  trade and portfolio level
• Value at Risk
• Trade Level
• VAR allocated to each trade is identical
• VAR is reviewed weekly

Company Objectives
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Implementation Appendices

Process Management
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• Portfolio Level
• An overall Adjusted VAR limit of 2 of capital
  based on a two standard deviation move in the
  underlying
• VAR calculated in three ways
• Simple
• Portfolio
• Adjusted
• Cambridge employs worst case scenario methodology
• FENICS system used for risk management
  calculations
• Leverage is calculated on a weekly basis and is
  based on a self correcting mechanism that relies
  on the historical risk adjusted performance of
  the model
• Ruin Theory is employed to generate probability
  using Monte Carlo simulations that dictate the
  risk inherent in each trade and therefore
  position size

Company Objectives
Investment Risk
Implementation Appendices

Process Management
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Company Objectives
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Process Management
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IMPLEMENTATION
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Company Objectives
Investment Risk
Implementation Appendices

Process Management
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• Report from Client/custodian to Hammond Black
• Consolidated country allocation report to Hammond
  Black on a monthly basis (or as required)
• Net currency exposure decision
• Hammond Black decides what is the appropriate net
  currency exposure for the portfolio within client
  guidelines
• Hammond Black implements the strategy using
  currency forwards and / or options with its
  interbank counterparts
• Reports from Hammond Black
• Custodian gets all trades executes by Hammond
  Black
• Client gets activity and performance report on a
  monthly basis
• Overlay clients have access to net exposure via
  our website

Company Objectives
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Process Management
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• Client signs investment management agreement with
  Hammond Black
• Client signs clearing/collateral agreement
• Client segregates or provides a line of credit or
  securities for overlay
• Clearer sets up FX lines with Hammond Blacks
  trading partners

Company Objectives
Investment Risk
Implementation Appendices

Process Management
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Hammond Blacks Trading Partners Union Bank of
Switzerland HSBC Deutsche Bank Royal Bank
Scotland Royal Bank Canada AIGFP Saxo Bank
Company Objectives
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Process Management
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Appendices
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• PETER HENRICKS
• Peter holds a BA from Flinders University of
  South Australia and a Masters of Project
  Management from the University of Technology,
  Australia and is a doctoral candidate at the ISM
  in Paris. He began his career at Shearson Lehman
  where he was responsible for trading short dated
  treasury instruments and rose to senior dealer in
  Hong Kong. He was subsequently promoted to
  merchant banking head in Australia with
  responsibility for treasury, stock broking,
  foreign exchange and fixed income.
• In 1993 Peter joined Alliance Capital as CEO of
  various subsidiaries throughout Asia. In this
  position he was responsible for leading the teams
  that managed Far East equity portfolios. He
  oversaw research, office administration,
  compliance, institutional marketing and retail
  sales. During this period, Peter founded offices
  for Alliance in Australia, Hong Kong, Taiwan and
  negotiated the J.V. in China with Ping-An.
• Under his leadership the Australian offices
  became fully integrated fixed income and equities
  management operations that grew to 100 employees,
  with over USD 28 billion in assets.
• In addition Hong Kongs retail and institutional
  assets grew to exceed USD 5.5 billion and the
  Taiwan office became one of the leading retail
  fund distributors within Alliance and in Taiwan.
• Prior to the establishment of Cambridge Strategy,
  Peter founded RPMH and AJIA-RPMH Inc which
  manages global and Asian equities. Peter works
  with the Bank of International Settlements on
  financial stability in developing markets.
• RUSSELL THOMPSON
• Russell has a BSc(Hons) in Economics, and is a
  member of the Association of Corporate
  Treasurers, having passed his ACT exams with
  distinction. Russell began his career at Midland
  Montagu in 1989 as a business analyst, and
  quickly moved to being a Derivatives and Money
  Market Trader assuming responsibility for trading
  and hedging the Medium Term Sterling Mortgage
  Swap Book, and the Latin American Brady Bond
  Portfolio.
• In 1995 Russell joined HSBC Markets in Hong Kong
  as a Forward/Proprietary trader, Trading the DEM,
  CHF, AUD and ZAR books, and running the short
  dated HKD Arbitrage book and a proprietary
  trading book. He progressed to Senior Derivatives
  Trader, successfully creating and running the Non
  Deliverable Forwards desk through the turbulent
  Asian Crisis, and producing record profits for
  the Bank.
• In 1998 Russell joined AIG Trading as a senior
  Trader, and was quickly promoted to Head of
  Trading for Asia. This included responsibility
  for all aspects of Currency and Interest Rate
  Trading in AIG Inc. HK, including Trading, Risk
  Management, Personnel, and Compliance. AIG
  Trading Inc HK was a 1st Tier Market Maker in
  Asia, and was focused primarily on Asian Emerging
  markets business. Russell was also responsible
  for trading and managing the successful AIG
  Proprietary Asian Currency Fund.
• In 2001 Russell resigned from AIG and moved to
  North America and co-founded two Companies,
  Platinum Destinations, a successful luxury
  lodging company based in Whistler, BC and the
  Perennia Fund, a closed-end Cayman Islands based
  private offshore Fund specialising in real estate
  investments. The Perennia Fund currently has 18
  Mio Usd of Assets under Management and after fees
  has returned 19.1 per annum to investors since
  2001. The Fund is currently closed to new
  investors.
• In 2003 Russell joined RPMH LLP. as a consultant
  to develop a Foreign Exchange platform which
  began trading in 2004. Russell manages the North
  American and Asian Time zones providing 24-hour
  global coverage to the Cambridge Strategy.
• ANDREW BENT
• Andrew graduated from Manchester University with
  a BA(Ord) with credit in History. He began
  working for Hong Kong and Shanghai bank in
  Manchester as a Junior Dealer on the foreign
  exchange sales desk. Following the merger with
  Midland bank he was promoted to a senior sales
  role, responsible for the execution of foreign
  exchange, money market and derivative
  transactions with the offices key corporate
  accounts.
• In 1994 he joined HSBC Markets in Hong Kong as a
  trader on the currency management desk,
  responsible for running books in all of the spot
  and forward Asian currency pairs. He was promoted
  to the position of Senior Trader in 1997,
  assuming the additional responsibility of market
  making the short-dated NDF books following the
  creation of the desk .
• In 1998 Andrew was appointed Head of NDF Trading,
  responsible for managing all aspects of the
  enlarged business, and was involved in both
  regional and global steering committees aimed at
  standardizing market practice.
• In 2000 he was made Head of Asian Currency
  Trading, with a mandate to develop and manage the
  strategy for both deliverable and non-deliverable
  trading in the centre. During this time the
  business attained a consistently high ranking in
  a number of industry surveys e.g. Best Bank
  Emerging Asian Currencies 2002 (FX Week).
• Andrew resigned from HSBC in 2003 in order to
  return to the UK with his family. He spent the
  following two years investing in, renovating and
  managing property in North Yorkshire, as well as
  being heavily involved in local charity work. He
  recently made the decision to return to the
  financial markets and manages the European time
  zone for the Cambridge Strategy.

Company Objectives
Investment Risk
Performance Appendices

Process Management
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• Contact Details
• Peter Henricks Andrew Bent
• pete_at_thecambridgestrategy.com andrew_at_thecambridg
  estrategy.com
• pete_at_arcanum.co.uk
• 44 (0) 207 7870 5720 (London Office) 44 (0)
  207 616 4743 (London Office)
• 44 (0) 776 980 6128 (UK Mobile) 44 (0) 774
  261 0663 (UK Mobile)
• petehenricks Skype andrewbent1 Skype
• 44 (0) 207 616 4708 Fax [phone]
  4708 Fax
• Russell Thompson
• russell_at_thecambridgestrategy.com
• russell_at_arcanum.co.uk
• 1 778 328 7651 (Vancouver Office)
• 1 203 987 5453 (North America Direct)
• 1 604 808 6417 (World Mobile)

Company Objectives
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Performance Appendices

Process Management