Trades of the Living Dead

Style Differences, Style Persistence and Performance of Currency Fund Managers

by Momtchil Pojarliev, CFA, and Richard M. Levich
Journal of International Money and Finance
vol. 29, issue 8, 2010, pp. 1752-1775

A large number of academic and professional studies support the notion that various types of currency trading strategies can be quite profitable. Knowing that currency alpha can be easily transported into a wide range of investment products, the asset management industry is naturally very interested in currency as an asset class.

However, recent performance of currency managers has been disappointing. For example, both the Parker FX index and the Barclay Currency Traders Index (BCTI), which track the performance of currency managers, have underperformed cash (risk free returns) over the three years ending March 2008. Performance over a three-year term is an important measure as it sometimes is associated with the “average life” of an investment mandate.

In earlier research, Pojarliev and Levich (PL, 2008) show that a significant part of the variation of the returns of professional currency managers can be explained by these three trading strategies and an indicator of currency volatility. PL redefine the alpha in currency management as only that portion of the excess returns which can not be explained by these four factors. In this paper, we take a closer look at the returns of professional currency managers by estimating their alpha performance measures and style betas over successive annual intervals. We are interested in the following questions: First, is past performance any indication for future performance (are alphas persistent)? Second, are investment styles (beta exposure) persistent? Third, what differences in performance are there between funds that survive throughout the sample period and those that do not? And finally, what explains difference in performance between funds that survive and those that do not?