3D Currency Management, a London-based company, is launching a new fund inspired by increased interest in foreign exchange as an asset class. The Protected Capital Currency Fund uses a capital protected structure to reassure investors.

Investment returns are generated globally and the company says that the product provides the retail sector with a professionally managed vehicle to invest in this asset class.

The launch of the fund comes at a time when, as a result of large falls in equities and financial turmoil, there is interest in any asset class able to offer relatively attractive returns.

The 3D fund has a targeted performance of 20 per cent per annum net of charges from trading currency. It is designed to return a 100 per cent minimum of an investor’s initial investment (£75,000 minimum) after a period of five years. There is a monthly quoted net asset value and redemption and a transparent fee structure.

“This fund offers investors an option that suits the prevailing market conditions. A capital protection element ensures that investors’ capital is not at risk whilst potential returns are generated from actively trading on the major FX market, the largest and most liquid market in the world. Not only does this give the opportunity to invest in a more secure way during periods of volatility, but it helps to diversify portfolios away from the more traditional asset classes,” said chief operating officer Neil Staines.

3D’s fund is born of research that shows FX has become one of the world's fastest growing industries. A 2007 survey conducted by the Bank for International Settlements, for example, revealed that in the period from April 2004 trading volumes increased by nearly 70 per cent from an average daily turnover of $1.8 trillion to $3.2 trillion in 2007. This makes the foreign exchange market the largest, most liquid market in the world, exceeding the daily volumes of the equity markets combined.

The currency overlay and currency hedge fund industry has expanded in recent years but the share of global investment portfolios allocated to currency is still relatively small and presents the opportunity for significant further growth, especially in the retail sector, says 3D.

The prospects for further growth in the FX industry are excellent when the potential returns from other asset classes are likely to be muted, said 3D.  

3D argues there are a number of reasons why foreign exchange is an attractive investment area. For example, foreign exchange is not an absolute asset, meaning currencies can never become saturated or uniformly overvalued.  As one currency goes up in value, its counterpart goes down in tandem. There is always fundamental value in at least half of all currencies available. Neither is FX correlated with other asset classes, making it an essential diversification tool for investment portfolios.

Foreign exchange markets are the largest and most liquid in world, operating continuously through time. Somewhere around the world a financial centre is open for business and banks and other institutions exchange currencies 24/7, only stopping briefly at the weekend. This gives traders the opportunity to exploit global economic events in real time and makes the liquidation of currency investments easier and cheaper than in any other asset class.

Pricing is completely transparent.  Currency investments also don't always need to be funded, which makes them a potentially opportunity-cost-free source of return.  This is a principle around which the currency overlay and the managed currency mortgage industries are based.

As equity, bond and real estate investments are denominated in a currency by default, that currency can be sold and then bought back, or traded amongst any group of currencies independently of the underlying asset, without the need for the allocation of additional investment capital.

Currencies can also offer a relative yield, as interest rates paid on deposits in one currency can be substantially larger than those paid by another, so a major investment strategy in the currency management industry is based around the principle of holding higher yielding currencies funded through borrowing in lower yielding ones.

On the downside, currency markets have, in the past, demonstrated considerable volatility and dramatic movements, such as when sterling was ejected from the European exchange rate mechanism in 1992, or during some of the sharp falls in currencies during the Asian financial turmoil of 1997.