Currency Investor Roundtable The question of currency risk - helping investors to make the right choices
• Passive management versus active management
• Manage liquidity risk
• Manage drawdowns, which is the same as saying winning by not losing
• Achieve asymmetric returns • Add currency alpha
Passive overlay strategies are widely perceived as being fairly straightforward to implement. Is that true?
KS: I have a clear memory (in my former life as a quantitative fund manager) of introducing one of the earliest currency dynamic hedging overlay strategies, for a Japanese client in the 1980’s. I don’t remember it being at all straightforward to implement! There were so many different moving parts it required skill and attention to monitor the underlying exposure, and the hedge, and to adjust it accordingly and in a timely fashion, in markets that were often unpredictable and fast-moving. It required a global custodian with LQVWDQW DFFHVV WR DOO WKH UHOHYDQW LQSXW GDWD ÀUVW FODVV quantitative modelling and expert trading skills. Perhaps it is more appropriate to say that passive strategies are more straightforward in terms of being able to predict what sort of trades are likely to be implemented?
DM: 3DVVLYH VWUDWHJLHV UHTXLUH HIÀFLHQW implementation at low cost and the ability to meet FDVK ÁRZ UHTXLUHPHQWV 7KH\ VKRXOG EH UHODWLYHO\ straightforward to implement provided that they are properly set up with the right attention to all details, VXFK DV KRZ WR PHHW FDVK ÁRZV HYHQ ZKHQ PDUNHW conditions are adverse. This will require having a process in place to deal with unexpected events.
JB: Passive management is more straightforward compared to active management. However, there are still a lot of issue to consider for example, how to manage liquidity risk, what instrument to use, how to manage counterparty risk. How often to roll your hedges.
What do you see as the key attributes of a good currency manager?
KS: As an independent investment adviser, I lean towards currency managers who have an absolute
62 Currency Investor | Autumn 2011
passion for the currencies in which they trade, who have an instinctive understanding of the behaviour of the markets, but who can clearly demonstrate the ability to think independently of the herd. Experience matters a lot in this respect. Apart from that, my list of key attributes is unsurprising: trading skills, presence in the foreign exchange markets, quantitative modelling skills (if appropriate), good fundamental analysts on the team, etc.
DM: How much time do you have? We try not to be too prescriptive as to what makes a good manager. Don’t forget the advantages of active investment in currency mean that even the average manager should be able to add value. So to be good, we need to be convinced that the manager is better than average. That means that we are looking for evidence that the individuals involved are talented and demonstrate original insights. If the manager is discretionary, it could be the quality of analysis or thinking outside the box that convinces us. If the process is quantitative, we need to know enough about it to be able to form a view. We also look at the checks and balances in the process - effective control of risk and dealing costs - and a supportive business structure that will foster and sustain any advantages.
JB: Key attributes are to make money, manage risk and engage the client to tailor a solution that works for that client. There are many ways of making returns from currency, discretionary and model based are popular, a mix of both would be a good approach. A robust and disciplined risk management process would also be part of a successful program.
How much emphasis do you think investors should place on the investment style of managers (i.e discretionary, systematic, active, passive, etc) and how important are the merits touted by investment VSHFLDOLVWV RI H[SORLWLQJ PRUH GLYHUVLÀHG strategies?
KS: I think all styles, strategies and claims should be examined with great care and scepticism. If there is a JHQXLQH ÀW ZLWK WKH H[LVWLQJ SRUWIROLR WKHQ LW LV OLNHO\ to be a suitable approach, regardless of the label put on it by the manager.
DM: Investors have to understand the nature of the manager they are appointing. For starters, there’s a big difference between an active and a passive approach! If an investor is looking at active currency management, some styles will be
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