Insight Investment explores how a factor-based framework can improve currency management by capturing drivers like carry, value, and momentum. It challenges the idea that currency is just noise, arguing systematic premia exist and can be harvested. The approach blends hedging with return generation, reframing currency as a source of alpha rather than just risk mitigation.
A Factor-Based Approach To Currency Management
Insight Investment
Francesca Fornasari
Research
12 Pages
Key Takeaways
Multi Factor Currency Drivers: Five factors including carry and momentum explain a meaningful share of returns, with carry historically contributing over 50% of long-term currency excess returns.
Volatility Reduction Benefits: Factor-based hedging reduced portfolio volatility by roughly 20% compared to static hedging across multi-asset portfolios in historical simulations.
Diversification Impact Measured: Combining factors improved Sharpe ratios by about 0.3 to 0.5 versus single-factor strategies across developed market currency baskets.
Join our newsletter to have all of this content + Exclusive Newsletter Bonus Content delivered to your inbox every week
