FX CARRY TRADE Strategic Questionnaire for Family OffiCES

  Theme 1: Strategic Capital Allocation & Goals

1. Is the family's investment policy statement (IPS) flexible enough to allow for tactical, absolute-return strategies like FX carry? (Y/N)
2. Are we in a phase where generating uncorrelated yield (income not tied to stock dividends or bond coupons) is a strategic priority for the family? (Y/N)
3. Does the family's long-term liquidity profile allow for locking up capital in a strategy that may require a multi-quarter or multi-year horizon to smooth out volatility? (Y/N)
4. Is the family's goal to diversify away from a portfolio that is heavily concentrated in a single currency (e.g., due to a past business sale or legacy assets)? (Y/N)
5. Are we looking for a strategic hedge or a return stream that can perform well during periods of global economic stability and growth? (Y/N)

Theme 2: Risk Appetite & Family Constitution

1. Is the family's risk appetite sophisticated enough to understand and accept the potential for sharp, periodic drawdowns (a "carry unwind") in pursuit of long-term excess returns? (Y/N)
2. Is the potential return from this strategy meaningful at the scale of the family's total net worth, or would it be merely "diworsification"? (Y/N)
3. Would explaining a significant quarterly loss from this strategy to the family principals be justifiable within our agreed-upon risk framework? (Y/N)
4. Are we adequately compensated for the liquidity and tail risks inherent in this strategy, given our family's specific liabilities and ending needs? (Y/N)
5. Does this strategy align with the family's broader values and "constitution," particularly regarding exposure to specific countries or currencies? (Y/N)

Theme 3: Implementation & Oversight

1. Do we have the in-house expertise to directly manage the currency exposure, rollovers, and leverage, or a trusted, proven external manager to execute this? (Y/N)
2. Is our operational setup (prime brokerage, reporting, systems) robust enough to handle the complexities of leveraged FX trading? (Y/N)
3. Do we have a clear and disciplined process for sizing the position so that its risk contribution is appropriate for the overall portfolio? (Y/N)
4. Do we have a pre-defined exit strategy that is triggered by either a success (target return hit) or a failure (specific risk metrics breached), not by emotion? (Y/N)
5. Is this allocation being considered as a strategic, repeatable part of the portfolio, rather than a one-off speculative bet? (Y/N)

How a Family Office Should Interpret Their Answers

Scoring: A "Yes" answer across all three themes indicates a strong, prudent case for inclusion. A "No" in any theme, particularly Theme 2, should be a veto point.

• High "Yes" in Theme 1 (Strategic Capital Allocation): This confirms the strategy has a clear purpose within the family's unique financial ecosystem. It's not just a trade; it's a tool to solve a specific objective (yield generation, diversification).

• High "Yes" in Theme 2 (Risk Appetite & Constitution): This is the most critical filter for a family office. It confirms that the strategy's risk profile—especially its potential for sudden losses—is understood and accepted by the principals. It ensures the strategy aligns with the family's long-term temperament and values, not just a CIO's market view.

• High "Yes" in Theme 3 (Implementation & Oversight): This confirms the operational excellence required to run the strategy effectively. For a family office, this often means "if we can't do it well, we won't do it at all." It emphasizes the importance of proper execution and oversight over mere opportunity spotting.

Strategic Implication for a Family Office:

• Strong "Yes" across the board: The FX Carry Trade can be implemented as a sized, tactical allocation within the broader "absolute return" or "opportunistic" sleeve of the portfolio. It is a tool serving a defined purpose.

• Mixed or "No" Answers: The office should avoid a direct, proprietary carry trade. However, if the macro view is strong, they might seek the exposure through a more structured product with defined risk parameters or a highly specialized external manager, thereby outsourcing the implementation risk.

• The Family Office Mandate is Key: The ultimate question is not just "Is the carry trade attractive?" but "Is this the most suitable and well-understood tool for our family's specific goals and risk tolerance?" This questionnaire ensures that decision is made systematically.