Active Currency Investing and Performance Benchmarks

Posted: 21 May 2019

See all articles by Michael Melvin

Michael Melvin

University of California, San Diego (UCSD) - Rady School of Management; CESifo (Center for Economic Studies and Ifo Institute)

Duncan D. Shand

BlackRock, Inc

Date Written: May 2010

Abstract

There are no established benchmarks for evaluating currency investment manager performance. Some analysts have suggested that known investing styles like momentum, purchasing power parity, and carry serve as benchmarks. Challenges for this approach include: there is no market portfolio; there are many alternative generic factor constructions; different constructions of the same factor may have low correlations; the 3 factors may not provide diversification; and there is no “buy and hold” in the FX market. An evaluation of professional currency managers’ returns indicates that they are often generated independently from the generic style factors. Skill in timing is what investors should pay for and some managers demonstrate superior skill in timing the factors. Managers are also skilled at minimizing drawdowns relative to the generic factors. The use of generic style factors may be a worst case scenario instead of returns to which an FX investor may aspire.

Keywords: currency investing, performance benchmarks, carry, momentum, purchasing power parity

JEL Classification: F31

Suggested Citation

Melvin, Michael and Shand, Duncan D., Active Currency Investing and Performance Benchmarks (May 2010). CESifo Working Paper Series No. 3052. Available at SSRN: https://ssrn.com/abstract=1610069

Michael Melvin (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Duncan D. Shand

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

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