Tuesday, May 5, 2015

New Investment Fund offers Investors an "SDR Futures Account"

We have written a number of articles here suggesting that some day in the future we might see some type of digital asset backed currency that could eventually tie in to the SDR used at the IMF. While something like that does not exist today, it was interesting to see that a new investment fund is being offered to retail investors that is being marketed as an "SDR Futures Account".

At first glance you might get the impression that this is a new way for individuals to own actual SDR's like they use at the IMF. That is not the case though. Individuals cannot own SDR's (see what is an SDR) as used officially between member nations of the IMF.

It is possible, however, to build a currency hedge investment product that is based on the actual SDR currency basket allocation percentages used at the IMF. That is what this product does as a service for investors as I understand it.

The SDR currency basket is currently made up of four major currencies as follows:  the US dollar (41.9%), the Euro (37.4%), the British Pound (11.3%) and the Japanese Yen (9.4%). 

This basket of currencies basically just allows the SDR to be based on a more diverse set of currencies so that volatility in the value of the SDR itself is reduced (made more stable).

This new fund seeks to allow retail investors to essentially buy a money market type product that is allocated between the four currencies in the same way the IMF allocates the SDR currency basket. It requires a minimum investment of $10,000 (US), but a large number of currencies (over 10) can be used to purchase the investment (someone in Australia could buy in using Australian dollars for example). The investor can also sell out of the fund in any of the various accepted currencies. 

For example, a US investor could put $10,000 US dollars into this fund. The fund would then buy the four different currencies based on the SDR allocation percentages. So this investor would then own $4,190 US dollars, $3,740 US dollars worth of Euros, $1,130 US dollars worth of British Pounds, and $940 US dollars worth of Japanese Yen. The US dollars would be converted to the other 3 currencies at the prevailing exchange rate. For example if the US to Euro exchange rate were .90 the investor would get 3,366 Euros for his $3,740 US dollars. The total investment would then mirror the value of the SDR used at the IMF.

Over time, as the currencies moved up and down, the allocation would get off track and so the fund does a re-balance back to the original SDR allocation percentages at regular time periods selected by the investor. This is basically a multi-currency hedging type product for anyone concerned about potential future weakness in their own national currency. Just keep in mind that if your national currency is one of the four in the SDR basket, it will behave the same way in this investment. If your currency is US dollars and the US dollar drops, 42% of your investment in this will drop in the same way. The idea of this hedge is that the portion invested in the other 3 currencies reduces (hedges) the loss you would have if all the money were still in US dollars.

The fund charges fees to manage the account and perform the regular re-balance. Investors can compare these fees to what banks would charge for a similar multi-currency hedge type account.

They also offer a gold backing option for those who want to add some gold to the portfolio to further diversify. The gold option is available through The Merk Gold Trust which does allow investors to take possession of actual physical gold if they want to. There is also a Renminbi (RMB) depeg option for those who think China may depeg their currency from the US dollar. 

The idea of marketing this as an SDR Futures Account is interesting and pretty clever. It should help people think more in terms of the SDR like a future world currency. Investors in this will probably become well educated on the SDR currency basket and how currency moves within it impact the overall value of the basket since that would impact them directly. Just understand that the investor is not buying actual SDR's.

Added note: Just to be clear this is NOT the asset backed digital currency we have mentioned here on this blog in the past as something we may see in the future. This is simply a multi-currency hedge product that uses the SDR brand name as a way to market it to investors. 

Also, I had a high level banking expert who is a reader here review this article for accuracy. He likes the idea of anything that helps people understand SDR'S better. He did mention that investors should always compare the fees to make sure they are reasonable. He said there are banks who offer similar type products so investors can just compare the fees that way.

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