“Our clients have been rather disappointed with the performance of their currency investments since 2008,” says Guy Saintfiet, UK head of liquid alternatives at consultancy Aon Hewitt. “They were introduced as a diversifying asset but they ended up being correlated at exactly the time that diversification was needed most.” According to Saintfiet, many FX strategies are underpinned by carry trades, which more often than not break down in times of market stress as investors sell out of their riskier positions. Trend following is also a big driver of currency manager returns, but here managers lock in losses when the market turns and they exit their positions.
“Interest is still high in FX for hedging currency exposure, but for alpha generation we see more interest in global macro funds, which have a long track record for performing well when markets are in turmoil,” says Saintfiet.
Still, those investors who favour investing in a currency strategy fund, as against the more flexible macro strategy, should put their money into multi-strategy currency managers, because they can derive returns from a combination of carry, trend and valuation strategies.
| Relative Annual Fund Performance |
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| Source: BarclayHedge |
In terms of the dedicated currency managers on offer, Saintfiet says discretionary managers might be better placed to capitalize on current market conditions. “Discretionary currency managers have been faring better than systematic managers in this kind of risk on/risk off environment we’ve seen in the last nine months,” he says. “Markets today are driven by macroeconomic news flow and systematic currency funds have seen returns eaten up by trading costs, as the algorithm sells positions and adjusts the portfolio to suit the ever changing market sentiment, locking in losses.” In such an environment a discretionary manager can take risk off the plate – which systematic funds rarely do – or rationally judge whether moves are likely to be long-term trends, he adds. He also likes CTAs, which profit from the kind of herd behaviour commonly being exhibited in the current markets.
“It is a difficult time for hedge funds because they are usually driven by fundamental analysis, but today’s markets are completely detached from fundamentals,” adds Saintfiet.