We have recently learned something with regard to trading currencies; specifically that in a strategy involving switching or rotating currencies they should also be traded with debt and gold. That is, excluding gold and debt from the universe of currencies lowers rates of return and/or increases drawdowns to less than optimal.

Background: We are equity traders who occasionally run from equities when our various quant manipulations suggest we are about to get thumped. Traditionally in such a circumstance our go-to place has been treasuries, specifically the 10-year. But there are times (like now) when fleeing to bonds doesn't seem like a good idea. So we decided to reassess our strategy vis-à-vis alternatives. And our full-court-press of research shows that the best alternative is a strategy of moving between bonds, gold and the U.S. Dollar Index. This beats ALL strategies involving only one or two of those assets. More importantly for others is that it also beats ALL similar rotations among the Dollar Index and a collection of other currencies. (N.B. we are free to choose whatever time frame seems to be best suited.)

With regard to our strategy, it trades combinations of those assets rather than one alone. However there are times when the strategy will have us in only one asset, and many would express fear at being entirely in gold or the dollar. Few would fear being entirely in treasuries, although the period of greatest decline was indeed a time when all monies were employed in debt.
No one is going to get excited about the alternative rotation strategy; it does not have an exceptional rate of return. But it does have very good risk control, which is what we want in an alternative. None of this should be surprising, as we know how interrelated they are. Currency is all debt, except gold which is the traditional debt alternative vis-à-vis inflation. But then one of the costs of holding gold is the foregone interest. Since they cannot be separated fundamentally, it is logical that they not be separated in a trading program. But it took testing to convince us of such.

If you are a trader who exclusively trades currencies, you should experiment with expanding your universe to including gold and debt.


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