This paper examines whether currencies deserve greater consideration as an institutional asset class by separating manager skill from systematic strategy returns. It argues many currency gains reflect repeatable style factors rather than manager alpha, while selective managers still demonstrate persistent excess returns and diversification potential.
A New Look at Currency Investing
CFA Institute
Momtchil Pojarliev, Richard Levich
Research
106 Pages
Key Takeaways
Beta Explains Returns: Four style factors explained roughly 40% to 60% of monthly currency manager return variability, suggesting much of active performance reflected systematic exposures.
Alpha Is Scarce: The Barclay Currency Traders Index generated about 0.22% monthly excess returns, yet estimated alpha ranged from −0.72% to 0.96% annually after adjusting for style factors.
Portfolio Diversification Benefits: A 10% allocation to top alpha generators improved excess return by 1,029 bps annually with an Information Ratio of 1.04, outperforming naive currency beta strategies.
Join our newsletter to have all of this content + Exclusive Newsletter Bonus Content delivered to your inbox every week
