A New Look at Currency Investing

by Momtchil Pojarliev, CFA, and Richard M. Levich
Research Foundation of CFA Institute
Jan 2013

The authors of this book examine the rationale for investing in currency. They highlight several features of currency returns that make currency an attractive asset class for institutional investors. Using style factors to model currency returns provides a natural way to decompose returns into alpha and beta components. They find that several established currency trading strategies (variants of carry, trend-following, and value strategies) produce consistent returns that can be proxied as style or risk factors and have the nature of beta returns. Then, using two datasets of returns of actual currency hedge funds, they find that some currency managers produce true alpha. Finally, they find that adding to an institutional investor’s portfolio even a small amount of currency exposure—particularly to alpha generators—can make a meaningful positive impact on the portfolio’s performance.