Hunting for Alpha Hunters in the Currency Jungle

by Momtchil Pojarliev, CFA, and Richard M. Levich
Journal of Portfolio Management
vol. 39, no. 1 (Fall 2012), pp. 4-8

When equity markets churn out double-digit returns and fixed-income markets offer normal yields or declining rates, institutional investors can be somewhat relaxed. They can earn reasonable absolute returns with conventional strategies. Beta grazing goes a long way without much need to look for exotica.

But when expected equity returns seem slight and fixed-income has been overrun by scared rabbits looking for safety or small yields to maturity, things are different. What should institutional investors do to satisfy their need for more acceptable absolute rates of return?

In such an environment, the marginal contribution of alpha hunting is far greater. It goes beyond the desire for diversity into the necessity to earn a critical level of absolute return.

Recently Perold [2011] analyzed the dilemma of institutional investors in the current environment of low real returns. Perold offered four choices: accept a decline in future purchasing power, lower current spending, take greater equity risk, or seek alpha through greater active management. We elaborate specifically on the last option by focusing on how and where to look for alpha hunters. Our view is based on research for the forthcoming book A New Look at Currency Investing (Pojarliev and Levich [2012]).