Merk Absolute Return Currency Fund: Frequently Asked Questions
Find more answers in the Shareholder FAQ.
The Merk Absolute Return Currency Fund seeks to generate positive absolute returns by investing in currencies. The Fund is a pure play on currencies, aiming to profit regardless of the direction of the U.S. dollar or traditional assets classes. The Fund provides investors with the opportunity to add managed currency exposure to their portfolios, which may provide valuable diversification benefits.
Traditionally, currencies have been hard to access by U.S. investors, or have simply been unavailable to them. Every investment situation is unique; the appropriate currency allocation will depend on your specific circumstances and investment outlook.
The currency asset class typically exhibits low correlations to traditional asset classes, such as stocks and bonds. Therefore adding currencies to your portfolio may provide additional diversification benefits unobtainable through traditional asset class investments.
Merk Investments employs three distinct layers in composing currency weights for the Fund. Firstly, a quantitative analysis is employed, which takes relatively basic trading strategies and develops them into proprietary trading models. We call these the Absolute Valuation, the Absolute Carry, the Absolute Momentum, and the Absolute Resources. Secondly, we utilize a “risk overlay” to adjust currency weights based on statistical portfolio analysis to maintain expected portfolio risk within desired parameters. Finally, we overlay this with our own macroeconomic perspective, which takes into account our view on how global dynamics may play out in the currency market – this is referred to as a “macro overlay”.
Day trading is not a trading strategy the Fund typically employs. Day trading is generally associated with taking advantage of very short-term market inefficiencies, which typically only last for very short periods of time (in some cases less than a second) and would require that the Fund engage in rapid intra-day trading. Rather, the inefficiencies from which the Fund seeks to profit from are those that are inherent in the structural nature of the currency markets. As such, the Fund intends to employ periodic rebalancing of currency weights.
The Merk Absolute Return Currency Fund is able to take a net long position in the U.S. dollar should market conditions warrant, whereas the Merk Hard Currency Fund specifically aims to profit from a decline in the U.S. dollar, and as such, has traditionally been short the U.S. dollar. The Merk Absolute Return Currency Fund is a pure play on currencies, aiming to profit regardless of the direction of the U.S. dollar. In times when the U.S. dollar is appreciating relative to other major currencies, the Merk Hard Currency Fund may decline in value. Conversely, the Merk Absolute Return Currency Fund seeks to profit regardless of whether the U.S. dollar declines or appreciates.
Currencies may provide a variety of benefits to your portfolio. There are many participants in the currency space who don’t trade currencies for the specific objective of making a profit (tourists, governments, international corporations hedging foreign earnings), thus inefficiencies may be present and a professionally managed basket of currencies may prove to be profitable. The currency asset class has historically exhibited low correlations to traditional asset classes, and thus may provide valuable diversification benefits and may provide protection and/or profits in a bear market.
The Fund typically utilizes forward currency contracts to gain exposure to currencies. The net nominal U.S. dollar amount of these contracts will typically be fully collateralized. The very nature of a forward currency contract will always create a net short position and a net long position. By way of example, if the fund were to enter into a contract to purchase Australian dollars (AUD) by selling U.S. dollars (USD), this transaction in itself would create a net short USD position and a net long AUD position. Conversely, if the fund were to enter into a contract to purchase USD by selling AUD, this transaction itself would create a net long USD position and a net short AUD position.
Please see the most recent country allocation for a more detailed account of the Fund’s currency exposures.