Currency Investor Roundtable The question of currency risk - helping investors to make the right choices
KS: Institutional investors should make decisions about their currency management programs in a strategic manner, independent of current short-term crises.
They pay their currency manager to respond to short term market conditions. Whilst there may be a short term impact on activities, I do not have any evidence, at the time of writing, as to why there should be any ORQJHU WHUP UDPLÀFDWLRQV
DM: It already has – just look at the over-valuation of the Swiss franc. If the pressures on the euro do prove unsustainable and the single currency collapses, then managers will have more currencies to trade again (which increases their opportunity set and may take us back to the days of super-strong returns), but I’m not forecasting that to happen in the foreseeable future.
JB: Yes, I would agree that the European sovereign debt crisis is by no means over and it would have huge impacts in the currency markets.
Looking ahead over the next
few years, what key factors are most likely WR LQÁXHQFH FXUUHQF\ PDQDJHU SHUIRUPDQFH DQG shape the way the industry evolves?
KS: In the current climate, it is extremely hard to gaze into thH FU\VWDO EDOO ZLWK DQ\ GHJUHH RI FRQÀGHQFH The carry trade, currency trends and short term RSSRUWXQLWLHV DUH OLNHO\ WR FRQWLQXH WR LQÁXHQFH returns.
The quantitative managers had a set-back after the credit crunch, and it will be interesting to see how that resolves itself. But at the end of the day, a manager who can (a) demonstrate alpha within reasonable risk parameters, (b) deliver consistent returns over different market cycles, and (c) cope reasonably well in extremely volatile conditions, is always going to be on the receiving end of positive instituWLRQDO PRQH\ ÁRZV
64 Currency Investor | Autumn 2011 investors.
JB: There will be more regulation; more currency ZDUV PRUH UHVHUYH FXUUHQF\ GLYHUVLÀFDWLRQ DQG central banks will have the challenge of managing LQÁDWLRQ EXW IRVWHULQJ HPSOR\PHQW DQG JURZWK 7KH increase in regulation could reassure investors and perhaps increase their choice of managers. Strategies ZKLFK SULRU WR ZHUH SDUW RI LQWHUQDO SRUWIROLRV RI investment banks may be launched externally. Euro and US$ may lose some of their reserve currency status as debts levels increase US and Europe’s sovereign debt crisis continues without a grand solution.
The stretched valuations in currencies will compel more central banks to directly intervene which should provide challenges for currency management. All of this should lead to an increase in appetite for the specialist currency manager to manage that risk.
DM: We identify the main factors as the nature of currency markets, the impact of regulation and the returns that managers can deliver to investors. Currency managers usually do best when there is enough volatility in markets for them to make money but not so much that conditions become erratic and liquidity disappears. Economic divergence can help foster the right conditions and allow exchange rates WR UHÁHFW WKH GLIIHUHQW WKHPHV
Currently, the risk on/risk off environment and the tensions between the highly indebted developed world and creditor developing markets dominate EXW ÀQDQFLDO PDUNHWV DUH DOZD\V FKDQJLQJ DQG WKHVH themes are bound to evolve in ways that surprise. The threat of increased regulation is a potential dampener but currency managers seem to be less affected than many other categories.
One caveat is that managers have tended to target lower risk than in the past, so their expected returns have also come down, but many still charge the
same fees as they used to. They have to take care that
they share enough of the value they generate with their
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