Tapan Datta, global head of asset allocation at Aon Hewitt, says: “The rules have changed. The challenge facing active managers is that with the death of the carry trade, they have to rely on hybrid and macro strategies to have a better chance of succeeding.”
Investors can also take a more passive approach to currency investment by buying indices that track momentum and value in currencies. Leigh says: “But if an institutional investor takes this route, they must understand that it will be up to them to figure out the right timing to enter and exit these investments. By appointing an active manager, that responsibility is relinquished.”
It is also possible to take advantage of currency movements through broader investment strategies: Datta advises his clients to invest in hedge funds. “Hedge fund strategies will benefit from greater uncertainty and volatility in the currency markets,” he says. “Market anomalies throw up greater opportunities for strategies such as global macro and managed futures.”
Unanswered questions
It is understandable why many institutional investors are reluctant to use currency as an active asset class. It is a very different animal to bonds or equities – there are no coupon payments or dividend income. Like commodities, all returns come from price movements which give it a much more speculative characteristic. That reluctance has been further compounded by the dramatic underperformance of the asset class since the financial crisis. While there are encouraging signs that currency markets are recovering, there are still a lot of unanswered questions about how active managers will make money while the carry trade remains moribund and economic uncertainty continues.
But investors can ill afford to overlook currency and must assess the risks it poses to their portfolio. In the “new normal” world of lower return from both fixed income and equity markets, they cannot afford to ignore any asset class that could improve returns.
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