The USD/TRY/CAD Hedge Carry: Month 3, Still Kicking

It's almost the end of the third month since I launched my live USD/TRY/CAD hedge carry account. Close enough to just call it three and write about it, I think.

First and foremost, the most important detail: the account continues to hum along!

Since I last wrote about this account on November 1st, two events transpired that really put my young hedge carry attempt to the test.

The first event was relatively benign, but it degraded the performance of the account nonetheless. It came about on November 20th when the Central Bank of the Republic of Turkey decided to follow the trend of central banks around the world and lower the interest rate of the Turkish Lira. It was only a one-quarter point cut, but little bits add up, and less is less. Somewhere along the line my broker, Oanda, also decided to adjust their bid rate for TRY while also raising their ask rate on USD and CAD. All of this together meant less cash from daily interest swap payments flowing into my account.

Primarily, the reduced interest income only affected the portion of the monthly total that I do not draw out. When I first launched this account, my intention was to draw $5 per $100 "in play" ($68.76 per $100 actually invested in both sides of the hedge carry, the remainder sitting in the account to provide margin). At one point it became necessary to reduce my monthly draw target to $4.50 per $100, which was disappointing but necessary to avoid taking more out of the account than it was generating. Thanks to subsequent adjustments to the ask rates Oanda is charging for USD and CAD, I've been able to restore the draw target to $5 per $100.

The other big test, and really the serious one of the two, was the Dubai debacle. When the news hit about Dubai's debt problems, USD/TRY short traders ran for the exits. In a single day my account swung to a -54% unrealized loss and the available margin plummeted to zero. As equity markets around the globe began to follow suit, the greenback began to rise as per the usual when this sort of thing occurs, and thus USD/CAD began to move upward somewhat. The move up was not anywhere near the scale of the move USD/TRY made, but USD/CAD did perform its intended role within the context of this method somewhat, serving as an offset to any rise in the greenback versus the lira. Combined with my deliberate keeping of free cash in the account to pad the margin, a margin call was avoided.

I looked into the whole matter and came to the conclusion that it was mainly a "headline crisis" without much meat to it, so I waited for the event to pass and for things to get back to normal. Within about 48 hours my account was showing available margin again as people began buying TRY and the unrealized loss in the account began to shrink. This is one of the potential difficulties of this trading method: the available margin must be at least equal to your intended monthly withdrawal at the moment you order it or you cannot get it out of the account. Following this event, I've begun buying into the trade with subsequent deposits slowly, putting the cash into play in smaller pieces when I see the chart formations I use as entry signals. This slows down the growth of the income of the account, and it lowers to total interest rate, but the benefit of the enhanced margin outweighs these minor issues. Ultimately, once the portion of the income I draw reaches my long term target, this is what I intend to allow to happen anyway, that the leverage and effective interest rate of the total account should fall as the interest portion I don't withdraw stacks up in the account, which will enhance the safety and stability of it all.

Finally, at the time of this writing, the effective interest rate of the account (what I call the interest divided by the amounts I've deposited, minus deposits not yet in play and exclusive of accumulated interest) is 62.14% annually, and on the present total balance of the account it is 53.89%. In three more months, when the account is six months along, I'll post an update.