Forex Managed Accounts

Correlation describes how two investments’ returns have moved in relation to each other. It is one of the concepts investors weigh when thinking about how the pieces of a portfolio fit together, and it is worth understanding before reading any claim about diversification. This article is educational only; it is not investment advice, and nothing here is a recommendation of any investment or portfolio.

Correlation is summarized by the correlation coefficient, a number that always falls between -1.0 and +1.0, calculated from the returns of two investments over a chosen period. A positive coefficient means the two tended to move in the same direction over that period; a negative coefficient means they tended to move in opposite directions; a coefficient near zero means the measurements show little consistent relationship in either direction.

The word tended is doing important work in each of those readings. A correlation is a summary of tendency across many observations, not a rule about individual moves. A negative coefficient does not mean that every time one investment rises the other falls, and a positive one does not mean the two always rise together. Strength matters too: values near the extremes describe a strong tendency, while values near zero describe a weak one.

Three cautions keep the number honest. First, correlation is historical and period-specific: it is computed from returns over one particular window, at one particular frequency, and a different window or frequency can produce a different figure. Second, a measured correlation of zero is not a promise of independence; it means no consistent linear relationship appeared in that sample, which does not assure the two investments will behave independently in the future. Third, relationships between markets can change, and correlations measured in calm periods may not hold in stressed ones.

For those reasons, there is no universally ideal correlation target for a portfolio, and no category of investment can be assumed to carry a particular correlation. Whether any Forex fund or account is weakly or strongly correlated with anything else is a question about its actual measured returns over a stated period, not about its label. How correlation figures into diversification depends on the portfolio’s actual positions, their concentrations, and the strategy pursued, and diversification itself does not assure a profit or protect against loss.

Whether any of this matters for a particular portfolio is a judgment each investor must make independently, ideally with a qualified professional. Trading foreign exchange involves substantial risk of loss and is not suitable for every investor.

Related articles on this site cover the Forex market, alternative investments, the Sharpe ratio, managed accounts and hedge funds, and how to evaluate a manager’s track record.

Investors should take particular note of the Forex manager record of performance; however, this in itself should not be the only reason for choosing a specific Forex trading advisor.  The disclosure document should spell out the Forex managed account manager market approach and trading style. This information should be carefully reviewed along with the track record when the investor chooses a particular Forex trader.  Strong performance in the short term may be nothing more than good fortune.  Positive performance over a long time., and over many trades, may indicate that the trader’s philosophy and style are more robust than his competitors.  This is especially true if the track record includes periods of bull, bear, and flat trading ranges. It is important to remember that past performance is not necessarily indicative of future results.

A few metrics to take careful note of when reviewing a track record:

• How long is the track record?
• Is it skill or is the fund manager lucky?
• Are the results sustainable?
• Worst peak to valley drawdown: Could you still make money even if the manager has a positive return for the year?
• Assets under management: Is the manager trading and an insignificant amount of money, or has his track record proved to be scalable and sustainable?

With prudent allocation, a managed Forex account may help reduce the overall risk of a portfolio. A sensible investor should ensure that at least a portion of their portfolio is allocated to an alternative asset that has the potential to perform well when other parts of the portfolio may be underperforming.

Other potential benefits of a managed Forex account may include:
• Historically competitive returns over the longer term
• Returns independent of traditional stock and bond markets
• Access to global markets
• The unique implementation of conventional and non–traditional trading styles
• Potential exposure to as many as one hundred and fifty markets globally
• The Forex market typically has a high degree of liquidity.

If suitable to a client’s objectives, devoting twenty to forty-five percent of a typical portfolio to alternative investments may increase returns and lower volatility. Because alternative investments may not react in the same way as stocks and bonds to market conditions, they can be used to diversify investments across different asset classes, potentially resulting in less volatility and less risk. While it is true that many Forex managed accounts have historically profited, there is no guarantee that an individual managed Forex program will continue to benefit in the future. There is also no guarantee that an individual managed Forex account will not suffer losses in the future.