Currency Management Style through the Ages

Abstract

The use of active currency management as a source of return has risen rapidly in recent years. This article seeks to explore whether that growth is justified, looking both at the returns themselves in isolation as well as part of a wider diversified portfolio. This is done by replicating some of the inefficiencies that currency managers typically seek to exploit. The different inefficiencies can be equated to different currency management styles. The rationale being that if one can understand how the returns are generated, it can be accurately determined whether they are sustainable. The inefficiencies are replicated using simple simulations that seek to exploit them. In addition, correlations of these returns are examined to determine whether diversification between currency managers and other asset classes are meaningful. These relationships are investigated using data since the mid-1970s.