Hedging schemes like Freedom Rocks (FR) claim that investors can make "returns comparable to those that the big institutions make", at negligible risk, and with absolutely no forex knowledge, or trading experience: no charts, no analysis required; a "color by numbers" method.
I haven't subscribed to FR, but I've attended their presentation, and watched their videos. I'm familiar with the concepts behind hedging schemes.
The primary income source from FR is the swap interest that gets credited to your account, which is the difference between the net interest offered by the hedged currency pairs. Hedging inversely correlated currency pairs (e.g. EURUSD and USDCHF) means that you simultaneously buy or sell both currency pairs, hence you're effectively trading the cross pair (EURCHF in this case). If the correlation was 100%, then the EURCHF price would never move, and there would be zero risk. What the FR sales pitch doesn't tell you is that the cross pair could easily move 5%-10% within the course of a year, while the interest differential between the pairs remains something like 1%-2%. This price movement could either be favorable or unfavorable: that is completely fortuitous. Given a large enough time period, it should eventually sum to zero, but in the meantime your account must somehow survive fluctuations that could be several times the amount of the interest received.
Now, to make decent returns from an interest differential of 1%-2%, you need to apply very high leverage. In the FR presentation I attended, they were promoting up to 400:1 leverage. This ramps up both the interest payments and the effect of the price movement, in exactly like proportion, by up to 400 times, depending on what percentage of your account ("margin") you choose to place at risk. (So if the interest differential was 1.5%, then at 400:1 leverage and 10% margin, the return from the interest would be 1.5% x 400 x 10% = 60% p.a.; if you chose to risk 20% margin, the return would be 120% p.a., and so on).
One thing that the videos don't mention is that when countries' banking authorities adjust their interest rates, your broker will adjust his swap rate accordingly. This could either work in your favor, or against. An adjustment could mean that the differential between the rates in the inversely correlated pairs is no longer significantly positive, hence negating the main income stream.
FR also promotes a buy low/sell high concept, while saying that it's not necessary to analyze the market. This is fallacious, since without any analysis, there is exactly a 50/50 chance of being right or wrong in trying to guess price direction (or a 50/50 chance of price reverting to the mean, as they show in their video) at any point. Hence any gains made through the price movement are completely fortuitous.
Keep in mind that your bottom line at any point includes not only any profits that you might have "locked in", but also the profit/loss situation of any currently open positions; e.g. if you "lock in" $1,000 by closing your current position, and then later incur a loss of $700 on another position, the net effect is still $300, regardless of whether the first position had been closed, or not. Hence "locking in profit" (which was discussed during the presentation I attended) is an illusory concept.
You also need to keep in mind that every time you buy and/or sell a currency pair (i.e. to apparently lock in any profits gained), your broker effectively charges you the "spread" (which is how the broker makes his income). The more often you buy or sell, the more often this cost applies. Ironically, the better the correlation, then the lower the movement in the cross pair, and hence the greater the amount of the spread relative to any profit that is fortuitously made from the price movement.
And in addition to the spread cost, don't forget that you'll be paying a monthly fee to FR, irrespective of your investment performance.
In summary, then, as long as the inverse correlation remains close to 100%, applying high leverage will give you inflated returns from the interest differential. However, during periods where the correlation weakens, the risk (i.e. drawdown) involved could be several times the return.
Put simply, there is no such thing as a "free lunch" in forex. The only way to make a consistent income - whether hedging or not - is to have a real "edge", in terms of a directional system of entries and exits, while operating at a low enough level of leverage to preserve your capital long enough to allow your edge to eventually prevail. An edge is made possible only through many hours of dedicated analysis and study, to provide the necessary knowledge of the markets, and trading experience.
Finally, FR also offers network marketing, which will doubtless appeal to many. I live in New Zealand, where schemes like Amway - which sell consumable products - are legitimate, but network marketing of "intangible" products (like investment schemes unable to promise an absolute guarantee of profit) are likely to be classed as illegal pyramid selling. Hence I suggest that you first seek legal advice, with regard to your own country's or state's legislation, in this context.
David
I haven't subscribed to FR, but I've attended their presentation, and watched their videos. I'm familiar with the concepts behind hedging schemes.
The primary income source from FR is the swap interest that gets credited to your account, which is the difference between the net interest offered by the hedged currency pairs. Hedging inversely correlated currency pairs (e.g. EURUSD and USDCHF) means that you simultaneously buy or sell both currency pairs, hence you're effectively trading the cross pair (EURCHF in this case). If the correlation was 100%, then the EURCHF price would never move, and there would be zero risk. What the FR sales pitch doesn't tell you is that the cross pair could easily move 5%-10% within the course of a year, while the interest differential between the pairs remains something like 1%-2%. This price movement could either be favorable or unfavorable: that is completely fortuitous. Given a large enough time period, it should eventually sum to zero, but in the meantime your account must somehow survive fluctuations that could be several times the amount of the interest received.
Now, to make decent returns from an interest differential of 1%-2%, you need to apply very high leverage. In the FR presentation I attended, they were promoting up to 400:1 leverage. This ramps up both the interest payments and the effect of the price movement, in exactly like proportion, by up to 400 times, depending on what percentage of your account ("margin") you choose to place at risk. (So if the interest differential was 1.5%, then at 400:1 leverage and 10% margin, the return from the interest would be 1.5% x 400 x 10% = 60% p.a.; if you chose to risk 20% margin, the return would be 120% p.a., and so on).
One thing that the videos don't mention is that when countries' banking authorities adjust their interest rates, your broker will adjust his swap rate accordingly. This could either work in your favor, or against. An adjustment could mean that the differential between the rates in the inversely correlated pairs is no longer significantly positive, hence negating the main income stream.
FR also promotes a buy low/sell high concept, while saying that it's not necessary to analyze the market. This is fallacious, since without any analysis, there is exactly a 50/50 chance of being right or wrong in trying to guess price direction (or a 50/50 chance of price reverting to the mean, as they show in their video) at any point. Hence any gains made through the price movement are completely fortuitous.
Keep in mind that your bottom line at any point includes not only any profits that you might have "locked in", but also the profit/loss situation of any currently open positions; e.g. if you "lock in" $1,000 by closing your current position, and then later incur a loss of $700 on another position, the net effect is still $300, regardless of whether the first position had been closed, or not. Hence "locking in profit" (which was discussed during the presentation I attended) is an illusory concept.
You also need to keep in mind that every time you buy and/or sell a currency pair (i.e. to apparently lock in any profits gained), your broker effectively charges you the "spread" (which is how the broker makes his income). The more often you buy or sell, the more often this cost applies. Ironically, the better the correlation, then the lower the movement in the cross pair, and hence the greater the amount of the spread relative to any profit that is fortuitously made from the price movement.
And in addition to the spread cost, don't forget that you'll be paying a monthly fee to FR, irrespective of your investment performance.
In summary, then, as long as the inverse correlation remains close to 100%, applying high leverage will give you inflated returns from the interest differential. However, during periods where the correlation weakens, the risk (i.e. drawdown) involved could be several times the return.
Put simply, there is no such thing as a "free lunch" in forex. The only way to make a consistent income - whether hedging or not - is to have a real "edge", in terms of a directional system of entries and exits, while operating at a low enough level of leverage to preserve your capital long enough to allow your edge to eventually prevail. An edge is made possible only through many hours of dedicated analysis and study, to provide the necessary knowledge of the markets, and trading experience.
Finally, FR also offers network marketing, which will doubtless appeal to many. I live in New Zealand, where schemes like Amway - which sell consumable products - are legitimate, but network marketing of "intangible" products (like investment schemes unable to promise an absolute guarantee of profit) are likely to be classed as illegal pyramid selling. Hence I suggest that you first seek legal advice, with regard to your own country's or state's legislation, in this context.
David
