Do Professional Currency Managers Beat the Benchmark?
37 Pages Posted: 3 Nov 2008
Date Written: December 2007
We investigate an index of returns on professionally managed currency funds and asubset of returns from 34 individual currency fund managers. Over the period 1990-2006,excess returns earned by currency fund managers have averaged 25 basis points permonth. We examine the relationship of these returns to four factors representing returnsbased on carry trading, trend-following, value trading and currency volatility. These four factors explain a substantial portion of the variability in index returns in the entire period and in sub-periods. We perform similar regressions for the 34 individual funds, and find many funds where returns are significantly related to these four factors. Our approach impacts the definition of alpha returns from currency speculation, modifying it from the excess return earned by the fund, to only that portion of the excess returns not explained by the four factors. While the impact on measured alpha is substantial, we find that some currency fund managers continued to generate alpha returns in the most recent sample period.
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