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Inside Investment: Long live FX

Reports of the death of currencies as an asset class are surely exaggerated. Look for mean-reverting volatility to turn around the performance of currency funds.


A curious collision of geography, history and reading matter occurred on August 1. I was on the way to Bretton Woods in the mountains of New Hampshire reading the Financial Times. A report said that, after a poor 2005, many currency hedge funds were faring equally badly in 2006. It concluded: “A second year of losses could erode the post-Millennium consensus that currency is an asset class in its own right.”

The collapse of the Bretton Woods agreement in 1973 marked the end of fixed exchange rates. This, in turn, created the foreign exchange market as we know it. And what a mighty edifice it is. The Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity, published by the Bank for International Settlements in 2004, recorded that the FX market trades $1.9 trillion a day.

That survey also noted the rising power of institutional investors in the FX world. Their turnover grew 78% in the three years between 2001 and 2004, to $585 billion. Unfortunately, as the pink ’un pointed out, this surge in investment has coincided with a period of lacklustre performance. The Parker FX Index, which measures the returns of 66 currency funds managed by 45 firms in North America and Europe that focus on FX as an asset class, rose by a limp 0.02%

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