Improved transparency and faster trade executions in the currency markets are leading more plan sponsors to view currencies as an asset class that can provide alpha rather than just a hedge for other investments, although that also remains a primary use of currencies.
Last December, the Bank for International Settlements, Basel, Switzerland, reported that average daily turnover in global foreign exchange reached $1.9 trillion in April 2004, up 57%, at current exchange rates, from $1.4 trillion in April 2001, the last time the BIS conducted its foreign exchange activity survey.
The report mentioned pension funds as a primary driver of the increased volume. Although some currency market experts questioned the accuracy of the BIS numbers, they agreed that pension plans have become bigger players in the market.
Robert Savage, a managing director at Goldman Sachs & Co., New York, said pension plans have played a part in the growth of foreign exchange trading both by being more attuned to protecting exposure to their non-U.S. investments and searching for better returns.
"Pension plans are modifying their outlook on foreign exchange," said Mr. Savage, who runs the firm's New York foreign exchange asset sales desk. "In the past, they were mostly dedicated to equity managers or bond managers, but they're paying attention to foreign exchange overlay more than ever ... and they're looking for new sources of alpha."