Interest among institutional investors in currency management is growing at a significant pace, as pension funds and other institutions try to make the most of their currency exposure “Currencies are part of the world of investment for pension funds. To the extent they diversify outside their domestic economy they have currencies to deal with and it is only a question of how to deal with them most efficiently,” said John Gillies, director of consulting at Russell.
The currency management issue is even more important for those institutional portfolios with a large proportion of international holdings.
“Being a pension fund with holdings abroad you have a currency exposure you have to take care of,” said Cecilia Thomasson-Blomquist, head of foreign exchange and money markets at Swedish fund AP 1. “You have to decide whether you have the skill to do it internally or whether you need to outsource.”
A recent survey of UK fund managers by consulting firm Hymans Robertson found that currency overlay programmes and currency pooled funds attracted the largest increase in assets last year. This increase could be exported to other European countries where more and more institutional investors are requesting the help of external currency managers.
Over the last few years the reasons why investors decide to adopt currency management strategies have significantly changed. “Ten years ago more of the clients that were looking for currency overlay programmes were looking at risk reduction,” said Helie Dhautefort, managing director at Overlay Asset Management. “Now we are seeing that clients are looking more at alpha generation products in the currency market.”
Pension funds getting into currency management need to understand that this is a market heavily dominated by traders whose investment time horizons do not extend beyond a few seconds, something which is very different to the investment mindset of institutional investors. “This is a 24-hour market and we don’t have the kind of problems that for instance the long/short equity or the convertible arbitrage managers might have,” Mr Dhautefort explained. “We also have small trading costs and in terms of risk control we are probably the one market that is focusing more on risk control in the management process,” he said.
Poor performance in the FX markets over the last few years might deter those investors who are considering currency management as a way of generating alpha. “The market has been tough for the last couple of years but having said that, we have been providing probably the best information ratio in the asset management industry,” said Mr Dhautefort.
He cited different industry reports which found that over the last 15 years, currency managers had succeeded in adding more value than
any other active manager. “So overall, the industry has been performing well.”
Mr Gillies said that, as with any other asset class, investors considering currency investment should ask themselves two questions – a beta question, looking at the asset class and the reasons why they should invest in it and an alpha question, asking who are the best managers to do the job. Mr Gillies said there is a long track record of success among active currency managers. “The average percentage of managers adding value over a five-year period is about 70 percent,” he said. “Clearly there is some sort of beta there.”
However, market participants are confident of generating alpha from currency management. “We always approach the currency space as a source of alpha,” said Theresa Patti, manager of investor relations at Quantitative Financial Strategies. “There is excess return to be gathered from currency.” She explained she felt that in the past the asset class had been neglected. “People weren’t really trading [in currency] as they do with equities and fixed income.”
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