Currency:
Currency Absolute Return (CAR)

At Pareto we believe that exchange rate movements between developed market currencies are mostly random. Therefore, exchange rate returns cannot be predicted with any consistency. Periodically, however, exchange rates exhibit characteristics that can be exploited in a systematic manner to generate excess returns. Such characteristics include large cumulative moves that can be modelled as skew, as well as stochastic volatility effects. By modelling the properties of exchange rate movements it is possible to manage shortfall risk while, simultaneously, harvesting excess return.

The objective of the CAR strategy is to maximise the total return of a portfolio (defined as the sum of positive cash flows of the instruments comprising the portfolio), primarily through trading in forward FX contracts and currency options and futures, subject to an acceptable level of risk. The relevant parameters (e.g. notional value, reporting currency, expected return and / or risk) of the initial portfolio are defined by the client.

Pareto seeks to achieve this objective by employing proprietary statistical models that identify and exploit specific features in the structure of currency risk. The configuration of these models has been designed to attain a high level of expected return relative to downside risk.