This is the wrong time for institutional investors to change currency strategies, said Barry Gillman, director of portfolio strategies at Brandes Investment Partners, San Diego.
Although some currency hedges and carry trades recently have hurt portfolios, making a strategic move now amounts to market timing, he said. Currency hedging and the carry trade, an active currency strategy whereby an investor exploits spreads between interest rates in different countries, can perform poorly in the short run but tend to be beneficial in the long run, according to Brandes research.
Yet 38% of institutional investors said they are considering modifying or terminating their currency overlay program, according to the results of a recent unpublished survey Brandes conducted in December. The survey was based on 61 respondents, primarily from the U.S. and Canada.
Three-quarters of respondents' currency overlay programs had negative returns since July 1, as the U.S. dollar surged against other currencies, including 37% over the pound sterling and 13% over the euro during the period. Also, almost one-third of respondents said currency moves in the second half of 2008 caused concern.
The key problem, Mr. Gillman says, is currency strategy is particularly susceptible to irrationality.
Most plan trustees are aware of and have views on currency movements, Mr. Gillman said. As a result, sometimes you get a situation where ... you get behavioral biases in there. Drew Carter