Money Matters

Diversifying Your Portfolio: Justifying An Allocation To The FX Markets

The Foreign Currency Exchange Market (FOREX or FX) has become an attractive asset class to many Caribbean investors over the past 5 years. Many have discovered that FX is a perfect alternative to cash or money market deposits. They are discovering for themselves that FX presents a chance to achieve a higher return than is available on a plain vanilla deposit in exchange for accepting some additional currency risk.

FX is also uncorrelated with equity markets, so unlike the Stock Market, the FX market does not have a physical central exchange like the NYSE does on Wall Street. Without a central exchange, currency exchange rates are made, or set, by market makers. Banks constantly quote a bid and ask price based on anticipated currency movements taking place and thereby make the market

Major Banks like RBS, Barclays Capital, Deutsche Bank and Citigroup handle very large currency trading (forex) transactions often in billions and trillions of dollars daily. These transactions cause the primary movement of currency prices. A recent survey by EuroMoney shows that 80% of global volume is traded by the top 10 banks.

In the presently changing global markets, investors are seeking opportunities to achieve escalating financial goals by increasing the overall value of their portfolios. These goals are based on two primary characteristics, profit potential and the risks associated with achieving these goals. Over the past few years investors have been increasingly choosing alternative investments, such as managed currencies, as part of a well diversified portfolio.

A managed forex account provides an investor with an option to take part in the forex market and benefit from its high profit potential without having to trade for themselves. Accounts are also actively managed, so the investor is not invested in the market all the time. Registered Advisors, also known as Commodity Trading Advisors (C.T.A.) by the US Commodity Futures Trading Commission (CFTC) are prepared to go without any trading during periods of elevated risk, uncertainty, or volatility.

Profitable forex trading involves gaining experience and developing criteria to trade against. Using a managed account ensures that all beginner mistakes and emotions are taken out of the equation as trades are only made based on strict criteria, and are executed by experts.

The main advantages of a forex managed account are safety of the money invested, transparency of the account and control over the funds. Managed accounts allow less experienced or time-lacking investors to benefit from a market that can boast being the largest financial market in the world, open 24 hours a day, 6 days a week. Investors are free to diversify their portfolios and choose different types of trading strategies and risk exposures, based on their objectives.

As residents of the Caribbean increase their investment IQ in the forex arena, they should be reminded that the global forex market handles $3.2 trillion a day in volume. Within that space, there are hundreds of thousands of traders. The investor must do their research in selecting the right manager to trade their funds. Caution should be taken to many online brokers who earn commissions on the number of transactions placed and not on the performance of the account, hence they will suggest money managers that have a high volume of trades, as it’s better for them in the end.

In the end it comes down to choosing the right money managers, doing the proper due diligence and monitoring and diversifying your portfolio to protect against the risk of loss.

(Stephen Hart is a Managing Partner of Capital Ventures, LLC and writes on finance for Island Vibes Magazine. For more information on FX markets, please feel free to contact him at stephenhart@mycapitalventures.com or 813-375-9228. You may also visit Capital Ventures on the web at www.mycapitalventures.com.)