Active Currency Management
C. Shane Schurter
Ennis, Knupp & Associates, Inc.
February 28, 2008
Exploitable opportunities within the currency market exist and as such, for those clients who are comfortable with the inherent risks associated with this investment opportunity, they should consider allocating a portion of their risk budget to this area of the market.
Active currency management, which is uncoupled from the investor’s underlying portfolio, is a viable strategy for potentially adding return and diversifying total portfolio volatility. Of course, an investor has to be comfortable with the associated risks. In this paper, we put forth the notion of “beta” within active currency management. We are careful not to call the total return generated by a manager alpha, because that gives a connotation that extraordinary investment skill is present. Unfortunately, the current situation in the marketplace is such that no investable benchmark by which to gain beta exposure exists. This obscures relative performance assessment, as measured by the information ratio (the most useful performance metric for an active currency manager), and makes benchmarking a difficult, but not an impossible task.
We believe active currency managers can produce sustainable long-term positive returns. Over certain periods of time negative returns should be expected from active currency managers which is exacerbated by the fact that the investor (in a separate account structure) has to “cut a check” to cover these losses. Those clients averse to unplanned cash flows may want to consider a prefunded, commingled vehicle format. Maintaining a long-term investment horizon will prove beneficial as it relates to active currency management.
Number of Pages in PDF File: 12
Keywords: active currency management, currency overlay, currency alpha, currency absolute return, currency beta
JEL Classification: A22, A23, E44, F31, G11, G23working papers series
Date posted: February 5, 2010
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo8 in 0.438 seconds