FORUM
Which alpha strategies have proved most effective? Into which part of the portfolio does it fall – into alternative assets and how much?
NW: We do not have any external currency managers. Some of our external managers may run some currency risk but this is not a meaningful part of their strategies nor of the Fund’s overall active risk budget. All currency management is undertaken internally. We dynamically manage the hedge ratio in response to changes in expected returns across GLIIHUHQW FXUUHQFLHV ([SHFWHG FXUUHQF\ UHWXUQV UHÁHFW our views on the fundamental valuation of currencies, how quickly we expect actual values to revert to fair value as well as the interest rates provided by different currencies. We do not “bucket” our investments into “alternative” or any other type of category. We have a series of strategies in place that provide the framework for taking on active risk in the actual portfolio versus the benchmark and these strategies articulate the types of risk and returns we expect in each strategy.
JwvO: Based on research we believe a combination of strategies works best. Our currency strategies would have a beta or systematic beta character rather than an alpha character.
“Currencies can provide scope for
active returns and we actively manage the hedge ratio
internally depending on our view on the expected returns to
local currency versus foreign currencies.”
NEIL WILLIAMS
KR: Since our clients are Dutch pension funds with ORQJ GDWHG OLDELOLWLHV LQ (85 LW LV WKH FOLHQW VSHFLÀF OLDELOLW\ SURÀOH WKDW LV WKH GULYLQJ IDFWRU LQ KHGJLQJ large non-EUR exposures in our clients’ investment portfolios. In implementing our clients’ FX hedges risk-return considerations, liquidity and transaction FRVWV LQÁXHQFH WKH ZD\ WKH KHGJHV DUH H[HFXWHG DQG the instruments that are employed.
NW: We believe that currencies do diverge from fair value but ultimately mean revert. We believe that we can manage our currency exposures internally to a high standard. We are prepared to take meaningful risk positions on the currency versus the benchmark position.
JwvO: Risk, expected return, costs of hedging (transaction costs/carry), impact on liquidity.
Do you use a simple tactical hedging strategy or prefer a fully-hedged portfolio? On what basis is the selection made and how does the hedge UDWLR UHÁHFW \RXU SRUWIROLR DQG KRZ RIWHQ LV LW rebalanced?
Autumn 2011 | Currency Investor 55
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