From the February 2012 issue of Investment Advisor • Subscribe!

Profit in Any Direxion

Alternative investment pioneer Edward Egilinsky has something special: the only long-short currency index fund in the domestic mutual fund space

Photography by Natalie Brasington Photography by Natalie Brasington

Ed Egilinsky’s job just got a bit easier—thanks in part to 2008. For over 20 years, he’s spread the word on the importance of including non-correlated asset classes in the investment portfolio, and it only took the worst global economic crisis in the history of the world for his effort and education to pay off.

“[When] most people think alternatives, they don’t necessarily think mitigating risk,” he says. “But currencies, commodities, managed futures; they tend to actually reduce risk. Hopefully, they enhance returns as well, but reducing risk is the way institutions have used them for decades, first and foremost.”

As managing director and head of alternative investments at Direxion Funds, Egilinsky’s latest project is the firm’s Currency Trends Strategy Fund (DXFTX). With market volatility, Europe and continued global uncertainty, it’s getting attention.

“One of the things that we’re looking to do at Direxion is build out a suite of buy-and-hold alternative strategies, whether its commodities, managed futures or, in this case, currencies,” he explains. “The Currency Trends Strategy Fund specifically gives clients exposure to 11 different currencies, including those of developed markets, emerging markets and commodity-based countries.”

What makes it unique is that this replicates a long-short currency index, the only mutual fund that actually provides clients with a rules-based index approach to currency and investing that takes advantage of a rising or falling dollar. The methodology looks at price trends to determine whether each of the individual currencies that make up the index can be long or short against the dollar on a monthly basis. It offers a unique investment opportunity for today’s investors to gain access to a diversified basket of currencies not previously available to retail investors.

And unlike other currency funds, he adds, the Direxion Currency Trends Strategy Fund has no exposure to sovereign debt instruments, which could have credit risk.

“The key for us is directional volatility,” he says. “It doesn’t matter which direction you have, it’s an all-weather fund. It likes volatility, but if the ride does begin to smooth out, it can take advantage of that as well.”

Egilinsky started out as a biology major before getting sidetracked with alternatives, but the skill set translates. He’s held various senior sales and management roles throughout his career and has been involved with product development, most notably with (no surprise) Rydex.

“I headed up our alternative strategy area there and was involved in some of the first-to-marketplace strategies like managed futures in a mutual fund structure, hedge fund replication and long-short commodity strategies,” he says.

So why not go to Arrow Funds with all the other Rydex alums?

“Hey, I like Joe Barrato,” Egilinsky laughs (see "Arrow Funds' Alternative Plan," IA, November 2011). “He’s a good guy. I wish all the people and firms I’ve worked with success.”

The Direxion Currency Trends Strategy Fund recently changed its benchmark from the Alpha Financial Technologies Financial Trends Indicator to the pure currency index FX Trends Indicator (FXTI). According to the company, by changing its benchmark, the fund aligned itself with the only known long-short currency index in the retail marketplace, one that provides verifiable and repeatable data going back 10 years.

The fund is in a ‘40 Act wrapper, which means it isn’t very tax efficient (if at all), but with only about $18 million currently in assets under management, it’s a great time to get in.

“I believe most clients would want to have asset classes that don’t correlate to stocks and bonds and traditional investments,” he says. “You have to have at least 10% invested in alternatives to have the impact that you want in an overall portfolio.”

Egilinsky stresses people should recognize that currencies are a distinct alternative asset class, not only because of their low correlation to traditional investments such as stocks and bonds, but also because they tend to have a low correlation to other types of alternatives, as well.

Call it an alternative to alternatives.

“Well, I consider it so,” he concedes. “If it has lower correlation characteristics to areas like commodities and some hedge fund strategies and managed futures, it should be looked at as a separate alternative strategy to complement some of those. Currencies historically also tend to have lower volatility associated with them. Especially in this ‘risk-off’ environment, if you’re looking for alternatives that might not be as aggressive in terms of their volatility, this is something definitely to consider. I don’t say in lieu of fixed income, but if somebody wants to diversify away from fixed income or equities, and doesn’t need an income stream from all of their investments, this may be a good way to diversify with those clients as well.”

One other thing probably worth mentioning: Egilinsky adds that currencies trade about $4 trillion a day between central banks and multinational corporations, more volume than stocks and bonds combined on a daily basis.

“I enjoy the alternative space and it’s been a fun 20 years,” he concludes. “It’s been great to educate advisors and clients because there’s always a learning curve when it comes to this. But there will still always need to be that further education. First and foremost, something I stress with our head of sales and our sales team is that they have to be a resource for that client and advisor education.”       

 

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