FX CARRY TRADE Strategic Questionnaire for Fund Houses

  Theme 1: Macroeconomic Outlook & Market Regime

1. Is our house view anticipating a "risk-on" environment with stable-to-growing global growth? (Y/N)
2. Do we forecast a prolonged period of low volatility in major FX pairs (e.g., as measured by the VIX or J.P. Morgan G7 Volatility Index)? (Y/N)
3. Are we in a monetary policy divergence cycle, where central banks are moving interest rates at different speeds and magnitudes? (Y/N)
4. Do we have a view against a broad, sustained strengthening of low-yield "funding" currencies (like JPY or CHF)? (Y/N)
5. Is our outlook for global markets not dominated by imminent recession risks or systemic financial crises? (Y/N)

Theme 2: Portfolio Objectives & Diversification

1. Is the fund's mandate explicitly focused on generating absolute returns (alpha) rather than purely tracking a benchmark? (Y/N)
2. Are we currently seeking uncorrelated return streams to diversify away from traditional equity and bond risk? (Y/N)
3. Does the fund have a target return profile that is not being fully met by its current asset mix? (Y/N)
4. Are we comfortable with a strategy that may exhibit low correlation to other assets but can experience sharp, periodic drawdowns? (Y/N)
5. Is the fund permitted by its mandate and prospectus to use leverage and engage in currency trading? (Y/N)

Theme 3: Risk Management & Operational Capacity

1. Do we have robust risk management systems to monitor spot FX risk, forward positions, and leverage in real-time? (Y/N)
2. Do we have access to reliable liquidity and competitive funding rates in the target currency pairs? (Y/N)
3. Are we equipped to manage the political and event risk associated with emerging market currencies (if considering EM carry)? (Y/N)
4. Do we have a clear exit strategy and pre-defined stop-loss levels for carry trade positions in the event of a sudden "unwind"? (Y/N)
5. Does our team possess the specific expertise in macroeconomics and FX markets to actively manage and monitor this strategy? (Y/N)

How Fund Houses Should Interpret Their Answers

Scoring: A strong case for an FX Carry Trade strategy is indicated by a majority of "Yes" answers across all three themes.

• High "Yes" in Theme 1 (Macroeconomic Outlook): This confirms that the prevailing market conditions are favorable. Carry trades thrive on stability and rate divergence. A "No" here suggests the environment is too risky and the strategy is likely to underperform or suffer losses.

• High "Yes" in Theme 2 (Portfolio Objectives): This confirms the strategic need and fit within the portfolio. It indicates that the fund is not only allowed to use such a strategy but is actively seeking the kind of return and diversification benefits that a carry trade can potentially provide. A "No" here suggests the fund's mandate or current strategy is incompatible.

• High "Yes" in Theme 3 (Risk Management & Capacity): This confirms the operational capability to execute and sustain the strategy. This is the most critical theme. A carry trade is not a "set-and-forget" allocation; it requires sophisticated monitoring and risk control. A "No" here is a major red flag, indicating the fund lacks the infrastructure to manage the risks properly, regardless of the attractive opportunity.

Strategic Implication:

• Strong "Yes" across the board: The fund has a clear, justifiable case for actively allocating to an FX Carry Trade strategy. The next step is sizing the position and selecting the specific currency baskets.

• Mixed Answers: The fund may have a case, but it is not compelling or requires mitigation. For example, a positive macro view (Theme 1) without the risk management capacity (Theme 3) suggests using a managed futures fund or FX ETF that specializes in carry, rather than      building a proprietary desk.

• Mostly "No" answers: The fund should avoid or significantly underweight an FX Carry Trade strategy at this time. The market regime is wrong, the portfolio doesn't need it, or the operational risks are too high.