Bill McIntosh discusses ECU's Original Currency Program.

The ECU Group plc, a foreign exchange fund manager specializing in multi-currency debt management, is branching out with a new product aimed at asset managers. The ECU Original Currency Program (OCP) targets absolute returns through a forex-trading and interest carry strategy using developed-economy currencies.

With around $2 trillion in trading every day, foreign exchange offers unrivalled liquidity. The core currencies ECU deals in – the dollar, euro, sterling, yen, Swiss franc, and Canadian and Australian dollars – are, in turn, the most liquid forex instruments.

Though the Original Currency Program is a relatively new offering to investors, it builds on an 18-year track record for ECU's Managed Currency Mortgage Program, which has attracted $1.4 billion under discretionary management.

"We have been trading these currencies through major events many, many times before," said Michael Petley, the chief investment officer who began developing forex products at ECU in 1988. "By and large our risk management approach has been pretty tight."

The firm takes the view that periodic, albeit limited, losses are preferable to cranking up the risk profile on a shaky position. "You can always trade out and live for another day," is how Mr. Petley puts it. "The fact is with the amount of leverage in the markets you can get moves that bury funds," he said, citing Amaranth Advisors LLC and how its leveraged natural gas positions haemorrhaged $6 billion even though the final moves in the contract prices that killed the fund were well within a standard deviation.

The Managed Currency Mortgage Program is a vehicle for individuals and a few firms, with property mortgages, to reduce the value of the loan over time by borrowing in currencies that fall in value against sterling. The managers also seek to reduce the cost of debt servicing by borrowing in currencies with a lower interest rate than sterling.

The product has around 1,000 borrowers with an average loan exceeding £1 million ($1.95 million). The minimum income for using the program is £100,000 ($195,000), with the minimum loan being £250,000. The success of the program since 1988 means that an original investor would have been able to fully pay off a £1 million mortgage simply from the benefits of the management program. Since the program is structured around interest-only loans, it means the borrower will not have had to make any capital repayments.

Mr. Petley said that most of ECU's clients are predominantly U.K.-based with property-backed multi-currency loan facilities extended by private banking groups such as HSBC Private Bank, Citigroup, Kaupthing Singer & Friedlander and Dresdner Kleinwort Benson as well as corporate banking groups like Royal Bank of Scotland. ECU does, however, have several European borrowers, including some local authorities whose program is structured relative to the euro.

On the day ECU met with HedgeWorld, the Bank of Japan hours earlier had raised interest rates by 25 basis points to 0.5%. Mr. Petley and Neil Mackinnon, the chief currency strategist and a near legend in these circles for his previous tenure at Citibank, Merrill Lynch and the former Soros fund Nexus, had been busy adjusting the book—a relatively rare occurrence as the program may make only a dozen or so trades annually.

They ascribed mixed motives to the BOJ's move. One the one hand, they noted, there was pressure for an increase from the comments of European G7 members at the recent finance ministers' conference. On the other, it remains the case that the Japanese government is more worried by anaemic economic growth than the value of the yen. All in all, the subsequent hours of trading made clear that the yen is continuing to decline.

"There will come a time when the great unwind will occur, but we are not there yet," Mr. Petley said. He noted that the unwind out of yen borrowing is almost certainly to be the result of an event external to Japan and will be chaotic as players head for the exits en masse. For now, however, the carry trade lives on and ECU continues to find it an attractive proposition to sell (or borrow in) the yen from both a sterling and euro benchmark.

The Original Currency Program for asset managers returned 1.67% in January. The performance in 2006 was 6.05%. The data is unleveraged, though leverage can used. The vehicle for both OCP and the Mortgage Currency Program is a managed account.

Setting the roadmap for the ECU's strategy is its high profile investment committee. In addition to Messrs. Petley and MacKinnon, it includes Robin Griffiths, former chief technical analyst at HSBC Securities; Teddy Clarke, a former head of currency analysis at Baring Securities; George Magnus, a former chief international economist at UBS; and Simon Hunt, a specialist in China and major commodities markets.

Understanding the market's dynamics and the play of external factors on currencies is a key focus of the committee and of day-to-day management. "Market intelligence for us is a key input to our trading strategy," Mr. Petley said, noting the Committee's role.

Given the small number of annual transactions, ECU likens its approach that of a seasoned wealth manager rather than of a foreign exchange dealer. It aims to participate in medium-term market trends within the broader economic cycle.

ECU continues to look to the United States for possible expansion but is content to keep things the way they are for now. "Obviously it is something to consider," said Christopher Miller, who runs ECU's asset management operations. "I think in the U.S. it could work quite well. But we would need to get over the legal and regulatory issues and be comfortable with them."

The management fee for the asset management offering is 0.85% per annum with a 20% performance fee with a high water mark. Investment is through a managed account, and the minimum is $10 million. Performance fees are calculated on the manager's net gains achieved through FX gains and interest carry.

Trades are long sterling versus any developed-economy currency. The base currency is the dollar, though any currency may be used. Instruments used are spot forex, swaps and forwards.