Currency Investor Roundtable The question of currency risk - helping investors to make the right choices
an unconstrained basis so the two are not mutually exclusive.
JB: Yes, probably since the currency overlays are run at lower volatility and are perceived as less risky.
What steps can investment professionals take to help educate investors and Plan Sponsors about the relative merits of achieving absolute returns with currencies as part of an investment strategy and not just as a by-product of an active or passive de-risking program?
“The credit crunch proved to be a
particular problem for quantitative overlay strategies, and
many institutional investors withdrew their overlay
programmes at this time.”
KAREN SHACKLETON
to be hedged or unhedged to reduce the draw-downs. In Australia an unhedged mandate would give you the lowest drawdown and in US a hedged mandate. But the direction in both regions would be towards a more dynamic approach of managing currency risk.
Generally speaking in your experience, are active overlay programs less contested by investment committees and boards than an unconstrained currency alpha mandate and if so, why is that?
KS: Personally, I have seen no evidence of that. 3HUKDSV WKH GLIÀFXOW\ ZLWK RYHUOD\ SURJUDPV LV that it can be extremely tough for the lay trustee to understand them fully. Their complexity, the use of esoteric instruments, and the leverage required to implement the strategy, can leave trustees confused and unsure about likely performance outcomes. Where this happens, the trustees should rely on their independent adviser to act as the interface, to challenge the manager and to explore the strategy in more detail, perhaps outside the investment committee meeting.
DM: The nature of the program should meet the client’s requirements. If that is the case, there should be less scope for argument about the way it is implemented. An overlay can also be managed on
60 Currency Investor | Autumn 2011
KS: Perhaps the most important point to make is that a currency manager may feel obliged to have positions at all times. ,Q UHDOLW\ VLJQLÀFDQW RSSRUWXQLWLHV WR add value may only arise sporadically. Investment professionals can and should educate investors to be ready to act promptly in order to capture the alpha, as and when those opportunities arise.
DM: Investors should be helped to understand the nature of currency markets
– the large volumes transacted; the good liquidity and low dealing costs that result; and the high proportion of activity accounted for by participants who are QRW WU\LQJ WR PD[LPLVH SURÀWV 7KHVH FRPELQH WR give active currency managers a particularly good start when generating alpha. Analysis of the Mercer Currency Manager Universe shows that the median manager has consistently been able to add value over rolling three year periods on a risk adjusted basis. This can’t be said of many other investment categories.
,QYHVWRUV VKRXOG DOVR EH LQWURGXFHG WR WKH EHQHÀWV that active currency management can provide in generating an additional source of returns that brings GLYHUVLÀFDWLRQ DW WKH VDPH WLPH
JB: There are many positive points about active currency-
• Active currency makes money
• Currency market is highly liquid, has low transactions costs, which leads to high capacity
• The return stream is uncorrelated to returns of traditional betas (equities, bonds, etc)
• So, including active currency in a balanced portfolio should improve the overall performance by reducing risk and increasing returns.
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84 |
Page 85 |
Page 86 |
Page 87 |
Page 88 |
Page 89 |
Page 90 |
Page 91 |
Page 92