As a family office, your number one priority is straightforward; define an asset allocation strategy, then preserve and grow wealth for the high net worth family you represent. While most family offices take a multi-asset class approach to maintain a diversified portfolio, our experience tells us that many investment officers neglect the opportunities in the forex market.
The forex market isn’t just for banks, multinational corporations and speculators. This article will explain why your family office shouldn’t overlook the forex market and some of the approaches you can take to seek investment opportunities from the forex market.
Forex is an all-weather market
According to The Global Family Office Report 2020, published by UBS, family office funds’ are allocated to global equities (29%), fixed income products (17%), private equity (16%), real estate (14%), and cash equivalents (13%). The remaining 11% consists of allocations to hedge funds, precious metals and arts & antiques.
Each of the assets classes mentioned above requires holding long term positions and bullish conditions for capital gains. Unlike most markets, forex trading strategies do not rely on bullish market conditions for upside. Rather, adept traders thrive on volatility. No matter what economic situation we face, there will always be a disparity between the value of national currencies, ensuring an almost constant stream of trading opportunities.
According to Amazon’s Form 10-K for the fiscal year ended December 31, 2020, changes in foreign currency exchange rates impacted the company’s net USD sales negatively by $2.6 billion in 2019 and positively by $1.4 billion in 2020. These figures emphasise how important it is to manage foreign exchange risks and how optimisation can lead to profit rather than loss.
How can family offices engage in the forex market?
Unfortunately, many family offices see foreign exchange as a risk threatening their ROI rather than an asset class with profit-making opportunities. Trading forex is a hands-on, fast-paced activity requiring expertise that presumably most lack family offices. Fortunately, there is outside help from various asset managers in the forex space.
In the forex asset management space, there are tens of thousands of money managers promising the impossible. It can be hard to see the genuine artefact against a backdrop of those either faking or deluded.
One thing is for sure, running a consistently profitable trading strategy is tough but not impossible. At Scandinavian Capital Markets, we proactively seek successful traders. Our asset managers operate manual swing and position strategies, and also algorithmic and quantitative systems running scalping and day trading strategies. As a brokerage firm, we cater to any trading strategy and help clients build the best forex liquidity feeds. In several instances, through our assistance, we have transformed regular clients into profitable asset managers for our investors and partners.
Hedging foreign asset currency exposures
18% of family offices consider currency risk in their portfolio to be high. A further 26% consider currency risk to be moderate. Considering family offices allocate the majority of their investments to global equities and fixed income, it’s reasonable to assume they’re significantly exposed to US dollar-denominated equities.
For a US-based family office, that’s not a big problem. But, for the thousands of family offices based in EMEA and Asia, if their equity portfolio grows by several percent, but the dollar falls by ten percent over the year, that’s essentially a loss.
Overexposure to US dollar-denominated markets can be managed through hedging strategies. The same principle can be applied when allocating to investments priced in foreign currencies allowing you to access overseas investments without worrying about gains in weakening currencies.
As hedging is a risk management function rather than investment, institutional forex brokers provide access to their trading desks instead of looking for an independent specialist or hiring for the role.
Why forex makes sense for family offices
Low execution costs: In 2019, according to the UBS Global Family Office Report 2019, the total average spent on services by European family offices was 121 basis points (bps). The cost comprises 74 bps operational costs and 47 bps external investment management and performance fees. In contrast, forex brokers like Scandinavian Capital Markets charge just 5 basis points for order execution.
High returns: In 2019, the total annual performance of family offices in Europe was 4.3%, whereas it’s entirely reasonable for a forex money manager to earn, on average, north of 5% per month.
Low allocation requirements: Since most forex trading strategies are inherently more risky than other asset classes, higher returns justify lower allocations. Leverage is another factor reducing the amount of funds needed to allocate to a forex strategy to see meaningful returns.
Liquid investment: Forex positions are held for a few minutes to a few days, depending on the applied trading strategy. For most trading strategies, forex trades are only held for a matter of hours or days. In addition, on most trading platforms we offer, transactions are settled on your account immediately. Therefore, funds allocated to a forex strategy are readily available.
Advanced technology: The forex market boasts a wide range of advanced trading platforms offering sophisticated and compliant market analysis, trade management, reporting and execution functionality.
How Scandinavian Capital Markets can help
Scandinavian Capital Markets, launched in 2011, originally established as a wealth management company, later transitioned to become Sweden’s first STP-ECN brokerage in 2017.
Today, we focus on providing the best FX technology platforms, direct access to numerous liquidity venues and exceptional customer service to various players in the wealth management sector. We cater to hedge funds, prop traders, quant traders, money managers, and family offices.
If you’re looking for a platform to trade FX with tailor-made liquidity solutions or want to establish relationships with reliable forex asset managers with proven strategies, we can connect you. Contact one of our relationship managers today to kick start the conversation.