Investors seem ready to return to active currency strategies, which offer low correlations to traditional asset classes, experts said. The strategies also are considered good alternatives to hedge funds, as they offer greater liquidity and transparency.
The historic high volatility of October, and higher volatility generally, has meant better opportunities and greater rewards for many currency managers (Pensions & Investments, Nov. 10).
A few years ago, returns among active currency managers declined, driving investors toward other strategies, such as global tactical asset allocation, said Diane Miller, principal at Mercer LLC in London.
Currency managers have disappointed in the last few years, but last year was better, she said. Preliminary results from the Mercer Currency Manager Excess Returns Universe show that for the year ended Dec. 31, the median currency manager provided 150 basis points in gross excess returns of whatever benchmark they tracked. Over two years, that number was 70 basis ponts and for three years, 10 basis points.
Graham Wood, senior consultant at WM Performance Services, Edinburgh, said active alpha-seeking currency mandates were used by 10% of U.K. corporate pension plans as of Sept. 30 vs. 8% at the beginning of 2008. It is inching up at the moment.
However, the rate is double among public U.K. plans, 18% of which had active currency mandates as of Sept. 30 vs. 12% at the beginning of the year.
The £770 million ($1.118 billion) Cardiff (Wales) & Vale of Glamorgan Pension Fund hired Goldman Sachs Asset Management and Mesirow Financial to run £20 million each in active currency in January. Richard Bettley, pension fund manager, said Cardiffs investment panel liked the fact that active currencys returns would be uncorrelated to other asset classes.
We did feel currency was more transparent, and something we felt comfortable with, he said. Cardiff does not use any passive currency hedging. As a long-term investor, we feel currency is more cyclical and theres not much to gain from hedging.
Passive currency strategies can feed active ones, said Ms. Miller.
If you hedge you can decrease the currency risk, and if you have a risk budget you can spend that risk somewhere else, she said. We've been recommending active currency management for a number of years as one place to spend the risk.