Long/Short Emerging Markets Currency Fund
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Currencies have historically exhibited low correlation to other asset classes. Which answer is true?
Currencies, with their low or negative correlation to other asset classes, may make them a great diversifier for a portfolio.
Low correlation to other asset classes always translates to higher returns.
Currencies have low correlation to stocks and bonds because they are also securities.
Correlation is a measure of risk and should always be avoided.
Question 1 Explanation:
Congratulations, you’re off to a great start! Correlation is a statistical term describing the degree to which the prices of various asset classes move in tandem with one another. Currencies tend to offer low correlation because their prices are influenced by a broad range of economic and market factors. Asset classes with low or negative correlation to other asset classes may be a helpful diversifier to a portfolio of domestic and international stocks and bonds.
By some estimates, 70% of global Foreign Exchange (FX) transactions are NOT profit motivated. Transactions that are not profit motivated may create opportunities for profit seekers. Of the types of transactions listed below, which are NOT profit motivated?
Tourist exchanging currency for travel.
Corporations buying and selling currencies to expedite trade.
Central Banks managing exchange rates to achieve political and economic goals.
All of the above.
Question 2 Explanation:
Bingo! For all of these market participants, completing the currency transaction is more important than the price at which they transact. This is known as a market inefficiency which may lead to opportunities for profit seekers. So, “All of the above” is the right answer since these transactions are NOT primarily profit motivated.
Currencies play an important role in investing in emerging-markets stocks and bonds. Which of the following statements are true?
Portfolio managers of emerging-markets stock and bond funds always hedge away currency risk because currencies offer no diversification benefits.
The diversification benefits of emerging-markets stock and bond funds stem primarily from the stock and bond exposure, not the currency exposure.
Emerging markets stock and bond funds derive the bulk of their diversification benefits from the currency exposure itself, not the stock and bond exposure.
Currencies always lower the risk of investing in emerging market stocks and bonds.
Question 3 Explanation:
Nice job! Answer C is correct. Most investors have currency risk in their portfolio today, as a by-product of investing in foreign assets. However, the diversification benefits of investing in these foreign markets, like emerging markets, comes primarily from the currencies. The SilverPepper Long/Short Emerging Markets Currency Fund offers pure currency exposure, unlike emerging-markets stock or bond funds, which contain many similar risk exposures commonly found in domestic stock and bond funds.
SilverPepper’s Long/Short Emerging Markets Currency Fund is driven by what investment process?
Fundamental analysis on political, governmental, economic, and social factors that lead to active decision making on EM currency selection.
Working with currency specialist in each emerging market country that can provide insight on what the expected volatility and price will be for each currency that goes into the portfolio.
A technical process using multiple charts that compares EM currency prices to various developed currency spot rates.
A Behavioral Pattern-Matching Methodology that examines price distribution sequences and searches for repeatable and recognizable behavioral patterns of “greed and fear” that exist in emerging-market currencies.
Question 4 Explanation:
You nailed it! Answer D is correct. SilverPepper’s Long/Short Emerging Market Currency Fund uses a quantitative Behavioral Pattern-Matching Methodology that searches for predefined patterns in currency prices. The patterns are behavioral in nature and reflect the basic human emotions of fear and greed. These patterns form as investors, searching for higher returns, sell lower yielding currencies and purchase emerging-markets currencies, which are typically supported by higher rates of interest.
SilverPepper’s Long/Short Emerging Markets Currency Fund makes money in two ways. First, through “carry,” which is an attempt to capture the difference between the higher interest rate of an EM country’s currency, and the lower interest rate of a developed country, like the U.S. or Japan. And, second, by taking long or short currency positions in emerging markets currencies to exploit the appreciation or depreciation of the currency’s price.
Question 5 Explanation:
You're Smart!. The statement is True. This is exactly how SilverPepper’s Long/Short Emerging Markets Currency Fund generates returns for investors. “Carry” involves nothing more than buying a high-yielding currency and funding it with a low-yielding currency, in an attempt exchange a low interest rate for a higher interest rate. The second way is through capturing the appreciation (a long position) and depreciation (a short position) in an emerging market’s currency’s spot rate vs. the funding currency, typically the US dollar.
The SilverPepper Long/Short Emerging Markets Currency Fund has historically traded EM currencies that represent over half of the world’s population. The most heavily traded emerging markets countries are known as the BRICs. What four countries make up the BRICs?
Bolivia, Romania, Indonesia, and Colombia
Bulgaria, Rwanda, Iran, and Chile
Brazil, Russia, India, and China
Belarus, Russia, Iceland, and Cote D’Ivoire
Question 6 Explanation:
If you thought the “C” in BRIC was Cote D’Ivoire, you made a horrible guess! Yes, C is the correct answer. BRIC currencies are the Brazilian real, Russian ruble, Indian rupee, and Chinese yuan. Historically they represent the most liquid EM currencies, although the Russian ruble liquidity has suffered due to sanctions. The Fund trades a select number of currencies. The currencies that are eligible for the Fund are primarily determined by a currency's liquidity and the geographic diversity it may provide.
SilverPepper’s Long/Short Emerging Market Currency Fund provides which of the following?
Potentially important low correlation and diversification benefits.
A highly differentiated strategy: There are no other U.S. mutual funds that only invest in currencies.
Veteran currency-market experts as portfolio managers.
A proprietary Behavioral Pattern-Matching Model that looks for identifiable and repeatable price patterns to profit, either long or short, from changes in emerging-markets currency prices.
All the Above
Question 7 Explanation:
Awesome! Great Job! E is the correct answer. All the above statements are correct. First, the fund may offer low correlation and diversification benefits for investor portfolios. Second, the Fund is the only U.S. mutual fund to specialize in currency investing. Third, the Fund is managed by Absolute Return Strategies, Ltd., which specializes in analyzing and trading currency markets. Fourth, and finally, the Fund uses a quantitative model that attempts to identify well established Behavioral Price Patterns of “fear and greed” that exist in currency markets do to chasing the higher interest rates commonly found in emerging-market countries.
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