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generators. Looking only at the presentation and strategy description perspectives one would expect much more than average results from such programs. Facing the strong headwinds of earning money by investing in FX some of the big institutions completely gave up offering an internally managed FX program. Instead of offering internal programs they have switched over to offer clients access to external FX managers or FX manager indices. We are currently working with institutions on projects that involve launching FX manager based style indices and tailor made portfolios.
Generally, taking a closer look at “almost too good to be true” returns often discloses the rationale behind them – such as using simulated returns which have not much to do with the real world. Terefore figuring out the authenticity of any FX strategy is the first task when looking at a new strategy. Te better it looks the more cautious one should be. Earning money with FX is definitely not an easy task!
Is it true that in the long run only systematic FX strategies are able to deliver sustainable returns since emotions negatively impact FX returns?
Looking in our database the number of discretionary and systematic strategies is almost balanced. Tere is no clear picture about the correlation of being successful and applying a systematic or discretionary strategy. Much more important in delivering attractive long term returns is to have sound risk management. Often managers have a strong idea generation process but are weak on managing risks. We have seen many managers that have failed on managing risk or re- entering the market on time after suffering a draw down. In the end a trader or a system has to show
its ability to earn and preserve money over various market regimes and this they have to prove on a day to day basis, continually. Being successful over a period of time or in a specific market regime doesn’t at all mean you will earn money over the long run. For example look at the Carry trades which were very successful over a long period of time before facing severe losses throughout the financial crisis. Te right timing is crucial, not least in the selection of single FX programs.
If you are looking at your database and the six years of experience of managing an FX multi-manager program, which strategy do you think is the most successful?
As mentioned before there is no strategy or approach that guarantees sustainable attractive returns. Every strategy has its pros and cons – in order to be successful it needs the combination of a proper idea generation and a sound risk management. Additionally, the success of a strategy is often depending on the general market environment. How can a momentum based strategy deliver returns if markets are quiet and volatility is low? In the fund of funds we therefore try to tactically over and underweight certain trading styles according to our view of the current market environment.
What steps should investors be taking when they go about choosing a currency manager? What are important elements in their decision making process?
In our view there are at least five questions the investor should ask:
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