Trading Insights: CFDs are a tool for absolute return strategies
Data as of June 8 2023 7:02 UTC
The above chart illustrates the relative performance of a quantitative absolute return hedge fund strategy vs a buy-and-hold strategy of an equity index over a period of time. Past performance is not an indicator of future performance.
The aim of an absolute return strategy is to generate a positive return regardless if markets are rising or falling.
- Speculators i.e. traders can use CFDs to actively buy and sell through either going long or short and adjust to market conditions
- If a market is on a decline the speculator can short sell the market and attempt to capture profits as the market declines
- If a market is on the rise the speculator can go long and attempt to capture profits as the market rises
The key difference between absolute return and a relative return strategy
- A relative return strategy is for the investor that is happy to get the same return as the market. They will measure their trades against a benchmark such as the SP500 index.
- A relative return investor will seek to generate a return that matches the return of the index. So if the SP500 index has returned 10% over a 3 month period, the investor with a relative return strategy will seek to have a similar return as the index.
- Basically, this type of investor is happy to get the same returns as the “market” or benchmark.
Relative return investors typically will employ a long only approach i.e. they seek to make money only if a market is moving up. These investors will generally use stocks or ETFs for this strategy.
- The absolute return strategy is for the investor who seeks to generate an absolute positive return regardless of economic or market conditions without following a benchmark.
- CFDs are more efficient than stocks for short selling i.e. the CFD broker does not have to find and borrow shares to allow its clients to short sell
- Investors following an absolute return strategy may prefer to trade CFDs since CFDs are typically available through a CFD broker with less to no restrictions for short selling
Bottom line: The ability of the CFD trader to go short with the same efficiency as going long makes CFDs an attractive instrument for absolute return strategies.
The above commentary does not imply that one strategy is better than the other. All trading strategies involve risk.
Today’s economic calendar
Source: TradingView / J. Knobel June 8 2023 6:03 UTC
Commentary & insights
USD/CAD near key support
The CAD strengthen sharply against the USD after yesterday's Bank of Canada surprise rate hike
The below chart shows that the USD/CAD is approaching the key support near 1.33, further downside can not be ruled out if price falls below the 1.33 support area. Below 1.33 could expose the 1.3260s and the 1.3090s as potential further downside extensions. Upside risk seen above the 1.35s.
Not investment advice. Past performance does not guarantee or predict future performance.
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