Alpha Currency Strategy

The Cambridge Strategies Currency Alpha Programmes seek to identify short and long term moves in the major currency pairs using a series of predetermined parameters. Positions are established when all the parameters “match”. Once trades are constructed strict stop loss levels and profit objectives are entered. When a potential long term move is detected, a trade will be established and held for a longer period. Again positions are protected by strict stop loss levels. The system is designed to perform in trend-less as well as trending markets. Cambridge currently tracks these signals over multiple time frames in eleven currency pairs, 24 hours a day.

Automated programs supplement the system, but all trades are executed by a member of the management team to minimize “Event Risk”. In addition, the automated programs recommend entry and exit points, but actual stops and take profit levels are executed by a member of the management team utilizing known support and resistance levels in the market.

Emerging Market Equity

The Global Emerging Markets Equities Programme combines both top down and bottom up components.  We believe that at any point in time there is an identifiable set of factors that drive earnings, valuations and stock prices over the short to medium term.  These factors can be macroeconomic, cyclical or structural and can be global, regional or country specific.  Identifying these key drivers and market expectations for them is the first step in our investment process.

Our stock selection then identifies those stocks that offer attractive risk/reward characteristics relative to these key drivers.  This will sometimes lead us to pursue contrarian opportunities but in other cases stocks with high expected earnings potential will be attractive.  As a result our investment approach has both ‘growth’ and ‘value’ elements and leads us to a ‘style’ neutral portfolio.  We believe that corporate governance is a significant element of any stock’s risk/reward profile and our research addresses the subjective issues that link corporate governance to valuations.

Regional and country allocations are actively managed reflecting three elements: top down assessments, bottom-up opportunities and risk controls.  Country risk remains the largest element of portfolio risk in the emerging markets and effective risk control requires careful attention to country weights.  Currency exposures are a related source of portfolio risk and reward and are explicitly managed.  Although our bias is to be long emerging market currencies, there are times when the signals from our proprietary currency models motivate us to hedge our exposures.

We invest in non-benchmark stocks, including holdings in frontier markets.  These will generally be smaller holdings and they will only be maintained when we believe they offer exceptional upside potential.  The portfolio is limited to a total of 20% in the frontier markets.

Currency Risk Management

The Cambridge Strategy bases its leverage and risk management on a proprietary algorithm using advanced mathematical and statistical techniques which take into account the entire return distribution.

The Cambridge Strategy calculates leverage employed on a weekly basis. Leverage employed is essentially a self correcting mechanism, which relies on historical returns, and accurate downside risk estimation to proactively and dynamically adjust leverage to optimise returns while controlling risk. Using Extreme Value Theory, the expected shortfall of a strategy is computed and leverage is adjusted to match a preset threshold of maximum acceptable downside risk.

The implications of this methodology are significant. Leverage is dynamically adjusted to reflect market conditions. An increasing downside risk results in an automatic leverage decrease. Conversely, the leverage levels will increase as downside risk drops below the preset risk threshold. This proprietary leverage adjustment tool has demonstrated the ability to reduce downside risk while improving upside potential; a more detailed description is available in the research section.