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Foreign Exchange

FX comment: Poor experience in Record absolute return

Currency manager Record announced its final results for the year ended March 31 this week. What caught my eye was that, although notional assets under management increased slightly, there was a marked swing in mandates towards ‘active hedging’ (where clients seek to minimise their exposure to currency risk) and away from ‘absolute return’ (where clients seek to make a return from currency).

The active hedging product saw AUM treble from $4 billion to $12 billion – partly because Record signed up “two large US state pension funds totalling $ 8.1 billion”. You have to wonder if either or both of them start with a ‘Cal...’ (CalPers and CalSTERs: Stripe me up!)

The AUM in the absolute return product fell from $13.4 billion to $7.7 billion.

Neil Record, the company’s chairman and CEO, details the company’s investment policy in the profit statement: “We recognise and exploit two principal currency market characteristics (I use the term in the sense of ‘opportunities’) – the forward rate bias (or ‘carry’) and trends (or ‘momentum’). We also recognise another, less pronounced inefficiency – short-term ‘mean reversion’.”

Absolute return ‘exploits’ all three ‘characteristics’ whereas active hedging just pays attention to momentum – which explains the difference in the results of the products: the active hedging product has tended to result in positive performance over client benchmarks whereas absolute return “has seen a period of negative performance from July 2007.”

The company still has faith in its absolute return programme but will follow that time-honoured solution to underperformance: re-naming the product. From now on ‘absolute return’ will be described as ‘currency for return’, which appropriately sounds less, well, absolute.

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