Currency Investor Magazine Autumn 2010

Currency management
comes naturally to us
With over 30 years’ experience in active currency management, a multi-strategy
approach and access to a universe of over 50 currencies, we offer a broad range
of currency solutions designed to complement an investment portfolio.
For more information call +44 (0)20 7497 1900 or visit

www.investecassetmanagement.com
Telephone calls may be recorded for training and quality assurance purposes. Issued by Investec Asset Management, October 2010.
AUTUMN 2010
T
Gerry O’Kane Helen Rochford
his edition of Currency Gerry.Okane@currency- Helen.Rochford@currency-
investor.net investor.net
Investor comes out following Editor Production Manager
the publication of the Triennial Charles Jago Michael Best
Survey of the Foreign Exchange and Charles.Jago@currency- Michael.Best@currency-
Derivatives Market, from the Bank investor.net investor.net
Publisher Subscriptions Manager
for International Settlements (BIS).
Susan Rennie David Fielder
Rather than bringing forth a yawn Susie.Rennie@currency- David.Fielder@currency-
from the investment community, its investor.net investor.net
report provides useful ammunition Editorial Director Features Manager
for managers in their battle to Charles Harris Simon Moss

Charles.Harris@currency- Simon.Moss@currency-
demonstrate that currencies are an investor.net investor.net
investable asset class. The liquidity of Advertising Manager Commercial Manager
the market and opportunities for currency investment over the last
ASP Media Ltd
3 years have stood the test of (theoretically) the worst economic Suite 10, 3 Edgar Buildings
crisis since the 1930s. George Street, Bath, BA1 2FJ
United Kingdom
An analysis of the BIS report by Record Currency Management Tel: + 44 1208 821 802 (switchboard)
Tel: + 44 1208 821 801 (sales & editorial)
for this issue, highlights the healthy growth of spot and Fax: + 44 1208 821 803
forwards trading, hand-in hand with a fall in the trading of
options and swaps – hardly surprising considering the panic at Design and Origination:
Phill Zillwood Design Works
the time of the !nancial crisis about counter-party risk following
Phill.design@btconnect.com
the failure of Lehman Brothers’. Printed in the UK by Imagery UK
Probably the most obvious conclusion that can be drawn from Currency Investor (ISSN 1747-4051)
is published quarterly
the report is the gradual and increasing importance of emerging
www.currency-investor.net
markets, but Asia in particular. The !gures show not only rising
levels of cross-border transactions, but also that the Yen is still Subscriptions
seen as the safe currency, that Singapore has pushed Switzerland Please call our subscriptions hotline for further details:
+44 (0) 1208 821 801 or email subs@currency-investor.net
out to become the fourth biggest currency trading centre and
the Australian dollar has overtaken the Swiss franc as one of the Disclaimer
globe’s most traded currencies. ASP Media Ltd and its respective of!cers, directors and
employees does not recommend, or endorse any of the
securities, commodities or investments appearing in this
We intend to run a regular Regional Report feature in this magazine. The views expressed in Currency Investor
magazine focusing on Currency Management and Investment magazine are not necessarily those of ASP Media
activities within speci!c global hotspots. We start in this edition Ltd, which is not a !nancial advisor and does not give
investment advice. ASP Media Ltd is not an investment
with an in-depth overview of how the Asian markets are currently management company, a licensed !nancial advisor,
structured and the opportunities and dangers that race around registered investment adviser or registered broker-dealer
this diverse region. Seppo Leskinen of SEB warns that while and does not provide investment or !nancial advice or
make investment recommendations. Although every
current account surpluses continue and investment "ows into the effort has been made to ensure the accuracy of the
region, the risk of intervention remains. And, it seems, absolute information contained in this publication, the publishers
currency return strategies are currently out of favour there. can accept no liabilities for inaccuracies that may appear.
Readers are advised to consult a professional investment
advisor before undertaking any investment activities
Finally, many thanks for the kind words sent by industry doyens associated with currencies.
after our !rst edition of Currency Investor. We are always open
The entire contents of Currency Investor are protected by
to hearing opinions, new ideas and suggestions about how we copyright and all rights are reserved.
can improve our coverage of this exciting, dynamic and fast
changing industry.
Gerry O’Kane
Editor
DIANA PLES and BHAVESH TRIVEDI DR. MOMTCHIL ARNAUD GERARD
Leader POJARLIEV Currency Management
Currencies - still most tradable asset class De!ning Alpha in Alternative approaches
Currency Management
JOHN MCCANN FELIX SHIPKEVITCH THANOS PAPASAVVAS PHILIP POOLE

Fund Operations Regulatory Roundup CI Interview Viewpoint
Letting an Administrator Regulatory reports ‘Currency wars’ and
take the strain from selected markets emerging in"ation risks
16 The New Normal -

De!ning Alpha in
Currency Management
MAGNUS PRIM and SEPPO LESKINEN AXEL MERK TIM MAXWELL

Regional Report Listed Currency FX Managed Accounts
Asia - a market that can’t be ignored Vehicles Achieving realistically
sustainable returns
COMPANIES IN THIS ISSUE
11 Currencies – Still
the most liquid and
tradable asset market
A
A.G.Bisset & Co
Alpha Financial Technologies
page 45
page 4
Merk Investments
Morgan Stanley
page 64
page 5
B N
Bank For International page 11 Nomura page 8
20 72
Settlements Nykredit Asset Management page 6
Baring Asset Management page 9
O
BNP Paribas page 4
Overlay Asset Management page 4
BNY Mellon page 7
Timing - FX Managed
P
How Accounts - C
Pareto Investment Management page 7
Campbell & Company page 45
important is Achieving Parker Blacktree page 80
it for realistically D PIMCO page 19
achieving sustainable Deutsche Bank page 75 Principal Global Investors page 6
DTCC page 9
Currency returns Q
Alpha? E QP Capital LLC page 72
ETF Securities page 71 Quaesta Capital page 46
R
F
Record Currency Management page 11
First Quadrant page 46
Rhicon Currency Management page 20
H S
Hathersage Capital SEB page 56
Management page 16 State Street Global Markets Outside
56
HSBC Global Asset Back Cover
Management page 52 Swing Capital page 19
I T
Investec Asset Management Inside TD Ameritrade page 10
Regional Report Front Cover The Shipkevich Law Firm page 34
Asia - a market that ISDA page 51 Threadneedle page 6
can’t be ignred Towers Watson page 45
J
Trinity Fund Administration page 30
JP Morgan page 40
John Hancock Funds page 10 U
JSE page 10 UBS Investment Bank Inside
Back Cover
L W
London Stock Exchange page 5 Windham Capital Management page 5
WisdomTree page 4
M
Macro Currency Group page 6
02 Currency Investor | Autumn 2010

Autumn 2010 Contents
LEADER INVESTOR PERSPECTIVES

11. Currencies – still the most liquid and tradable 44. From strategies to style buckets: searching for
asset market in the world weakness in the investment process
Diana Ples and Bhavesh Trivedi examine the results of Gerry O’Kane sets out to help investors in the currency
the recent BIS Triennial survey into FX turnover which sector discover more about the strategies available in the
con!rmed that volumes traded daily on the foreign marketplace and their relative strengths and weaknesses.
exchange market are now past the $4 trillion mark.
52. Viewpoint: ‘Currency wars’ and emerging
CURRENCY MANAGEMENT in"ation risks
Some commentators believe that the world is in the middle
16. The New Normal - de!ning alpha in Currency of a “currency war”. Philip Poole looks at the reasons
Management behind this and the possible implications for investors as
appreciation pressures continue to build up with many
The recession caused by the !nancial crisis of!cially
Emerging Market currencies.
ended in June 2009 but the global economic outlook is still
uncertain. PIMCO calls this new world the “New Normal”
and Dr. Momtchil Pojarliev outlines what this could all
mean for Institutional Investors.
REGIONAL REPORT
56. Currency investment in Asia – a market that
20. Timing: - just how important is it for achieving can’t be ignored
currency alpha? Seppo Leskinen and Magnus Prim pro!le the range of
Gerry O’Kane interviews a selection of leading currency positive factors that continue to attract capital in"ows into
managers to gather their views on the importance of timing Asia and examine the potential for future growth in the
the market as a means of seeking alpha. currency investment business within the region.
26. Alternative approaches to Currency INVESTMENT PRODUCTS

Management
64. Listed currency vehicles – helping investors to
International investors hold two types of currency risk
and confusion between these different types of risk can
make the right choices
result in signi!cant currency losses. With this in mind Axel Merk highlights the many new currency mutual funds,
Arnaud Gerard examines the normal method of controlling currency ETFs and currency ETNs that have recently been
currency translation risk and highlights the challenges and launched and why investors should take time to understand
weakness of de!ning a !xed benchmark. the differences between them.
FUND OPERATIONS 72. Achieving realistically sustainable returns with

FX Managed Accounts
30. Currency Fund Operations – Why not let an Achieving sustainable success with Managed FX requires
administrator take the strain? investors to go through a comprehensive process by
John McCann discusses the process of fund administration questioning their advisor of choice. Timothy J. Maxwell
and the bene!ts currency managers can obtain by selecting outlines a practical guide to help them with this task.
a properly quali!ed, service-oriented, third-party fund
administrator, to assist them.
PERFORMANCE SNAPSHOT
34. Regulatory Roundup 80. October 2010 - The Parker Blacktree
Felix Shipkevich provides an overview of the latest global Currency Index (PBCI)
compliance and regulatory issues which have an impact on The PBCI is comprised of two sub-indices: the Currency
currency asset management operations. Managers Index (CMI) and the Investment Strategies Index
(ISI). The CMI Index measures the alpha generated by active
currency managers. The ISI Index is a portfolio of thematic
CI INTERVIEW rules-based trading strategies that decompose the market
38. With Thanos Papasavvas, Head of Currency into tradable themes.
Management at Investec Asset Management.
Autumn 2010 | Currency Investor 03

OAM develops
wealth preservation
currency tool
O
verlay Asset
Management has
announced the
launch of the BNPP/
OAM Wealth Preservation
Currency Index, a joint
AFT launches a
initiative with BNP
Paribas Corporate and
Long-Short Currency
Investment Banking. The
index will offer investors Futures Index VICTOR SPERANDEO
A
access to a ‘virtual world
reserve currency’ and lpha Financial Technologies has announced the
will help preserve the launch of the FX Trends Index (FXTI). The FXTI
purchasing power of is a long-short index designed to capture the
currency allocations. HÉLIE D’HAUTEFORT
economic bene!t of price trends within the currency
The BNPP/OAM futures markets. “The launch of the FXTI is the result
Wealth Preservation Currency Index (WPCI) tracks the of AFT’s continued research and development, which
performance of the 15 largest currencies, representing expands our robust line of long-short index offerings,”
80% of the world’s economy. Currency allocations said Victor Sperandeo, President and CEO of AFT.
are determined by GDP then adjusted according to Sperandeo added, “The FXTI meets the market’s need
purchasing power parity, which boosts the weight of for a long-short currency futures index that re"ects the
emerging market currencies. WPCI can be used for directional movement of major currencies. Institutional
investment, hedging, or as a benchmark for currency investors have long realized the bene!ts of the currency
exposure. markets as an alternative asset class, especially as a
potential way to diversify and enhance traditional stock
Overlay Asset Management’s CIO Hélie d’Hautefort and bond portfolios over long-term periods. Given the
commented: “WPCI goes far beyond a standard currency recent price moves and volatility within the currency
overlay programme by providing exposures to currencies markets, we think now is an opportune time to bring to
that are not linked to an investor’s underlying portfolio. market a strategy like the FXTI. Continued dislocations
Furthermore, the relatively high allocation to emerging in the currency markets will have the potential to create
market currencies – currently 40% of the index – taps into unique opportunities for trend-following strategies.”
their superior growth potential.”
WisdomTree launches
exposure to commodity currencies has historically
served to diversify a traditional portfolio.” CCX builds
on the success of the WisdomTree Dreyfus Emerging
Commodity Currency Currency Fund (CEW) in

providing investors with
Basket ETF
unique, less correlated
asset class exposures. The
W
Fund Seeks to Provide
isdomTree has announced the Launch of Exposure to Currencies
what it believes to be the Industry’s !rst U.S. of Commodity-producing
Commodity Currency Basket ETF (CCX). Countries Across Major
Export Groups and
Bruce Lavine, WisdomTree President & COO, Geographic Regions and
commented, “We believe commodity producing is designed to provide
countries are well-positioned to bene!t from a global broad-based exposure to
recovery and have developed CCX as an attractive money market rates
multicurrency basket with exposure to this theme. and currency
In addition to presenting a distinct alternative to movements.
BRUCE LAVINE
traditional currencies like the euro, yen and pound,

NEWS
HSBC ETF
Global Asset Securities
Management rolls out
launches 22 new
currency
absolute
ETCs
return fund
NIK BIENKOWSKI
E
CHARLES ROBINSON
TF Securities (ETFS), is planning to expand the
H
world’s largest and Europe’s !rst Exchange
SBC Global Asset Management has launched Traded Currency (Currency ETCs) platform with
the HSBC GIF Global Macro II Fund, a levered the launch of four emerging market and 18 GBP-based
version of the group’s "agship absolute return Currency ETCs on London Stock Exchange (LSE) in the
portfolio, the HSBC GIF Global Macro Fund. coming weeks.
The HSBC GIF Global Macro II Fund, like its sister For the !rst time in Europe, investors will have access to
portfolio, is a UCITS III, Luxembourg-domiciled SICAV emerging market Currency ETCs which enable investors
offering daily liquidity and is co-managed by Guillaume to go long or short the Chinese Renminbi (CNY) or the
Rabault and Jim Dunsford. The fund seeks to exploit Indian Rupee (INR). Since launching its Currency ETC
platform, ETF Securities has received signi!cant interest
pricing anomalies using complementary quantitative
for emerging market currencies such as the Chinese
and qualitative based strategies.
Renminbi and the Indian Rupee, which are traditionally
dif!cult to access for non-domestic investors.
Charles Robinson, Head of Alternative Distribution,
HSBC Global Asset Management, said: “This launch Nik Bienkowski, Chief Operating Of!cer, commenting
is very simply driven by client demand. Investors on the launch, said. “Over the past ten years, we’ve seen
praise our team for their distinguished process and that investors are looking for liquid and transparent
performance. But many macro investors seek higher markets and thus currencies are starting to appear on
returns and can stomach greater volatility so our their radar screens. In addition, currencies are driven by
base strategy is too conservative for these particular the macro environment, which has shown high volatility
individuals to meet their needs. As we have prior in the past few years, and because currencies are valued
experience in adjusting our capabilities to meet different relative to other currencies, therefore if one goes up then
return objectives, we were happy to engineer the same the other must go down. Thus depending on whether
solution in our "agship UCITS III strategy.” an investor has gone long or short, an investor can
potentially pro!t regardless of market direction”.
Windham announces launch

of tactical portfolio
W
indham Capital Management announced Turton, Windham Managing
that it has launched the Windham Tactical Partner and CIO. “The
Portfolio, an active asset allocation strategy Windham Tactical Portfolio
that uses proprietary risk measures to control exposures seeks enhanced returns
throughout market cycles. Through daily monitoring with more ef!cient risk
of the Windham Investment Risk Cycle™, portfolio management and !lls a
managers adjust the investment mix of the portfolio gap in the investment
to grow principal in times of low risk and to preserve options available today
principal in times of high risk.“Traditional strategies to individuals and small
LUCAS TURTON
use costly hedges to reduce downside risk,” says Lucas institutions.”

Threadneedle launches Investec
emerging market Asset
absolute return fund Management
T wins EMD
hreadneedle has announced the launch of its
Threadneedle (Lux) Absolute Emerging Market
Macro Fund, for investors who want to tap into
opportunities in emerging market debt and currencies,
whilst bene!ting from the increased "exibility of a mandate in
Denmark
UCITS III structure. The fund has been awarded an A
rating by S&P. Lead manager on the fund will be Richard
House, Head of Emerging Market Debt at Threadneedle.
Mr House has 15 years experience in emerging markets CLAUS BILDE
I
investment and three years hedge fund experience.
nvestec Asset Management announced that it has
Mr House said. “The been appointed to sub-advise a newly launched
new Threadneedle (Lux) emerging markets debt fund by Nykredit
Absolute Emerging Market Asset Management, a prominent !nancial services
Macro Fund allows us to organisation in Denmark.
exploit the many macro-
based opportunities that The Fund will be open to both retail and institutional
exist across the Emerging investors. It will be managed by Investec’s Emerging
Market universe, without Market Debt Team using their proprietary investment
the constraints of any index. process developed speci!cally for locally denominated
Within the fund, we have emerging market debt and currencies. Claus Bilde, Head
the "exibility to express of Manager Selection at Nykredit Asset Management,
our highest conviction commented, “We are pleased to appoint Investec
macro views via Asset Management to manage this fund. Following a
sovereign credit, rates thorough due diligence process, our decision to choose
and FX, both on an Investec Asset Management endorses the quality of the
absolute and relative RICHARD HOUSE team, the robust risk-adjusted returns delivered through
basis. Using processes differing time periods, and the Firm’s client-focused
and resources that we have successfully employed over approach.”
the years in our Threadneedle Emerging Currencies
Crescendo Hedge Fund, we aim to deliver absolute
returns to a broader range of investors under UCITS III.” has a target volatility of 25%, managed on a three year
annualised basis, with an implied return target of 17.5%.
The Fund complements the 15% target return fund
Macro Currency Group

launched by Macro Currency Group in February with a
further 10% target return fund set to be added on to the
range in Q1 2011.
announce new Fund Commenting on the fund

launch, Nick Lyster, European
M
CEO of Principal Global
acro Currency Group, announced the launch of Investors, said, “Macro
the Principal High Alpha Currency Fund (the Currency Group’s goal is
Fund), a Dublin-registered Qualifying Investor to offer high performance,
Fund launched with £25mn of external seed capital. absolute return strategies
The Fund is a response to clients’ growing interests in that give investors the
the group’s higher alpha capabilities, with net in"ows con!dence to increase
into the high alpha funds totaling $185mn in 2010 alone. their long term exposure
This brings total net in"ows across the wider currencies to currencies. Simply using
business to $650mn for the same period. currencies as an overlay
function to limit portfolio
The Fund is a sub-fund of the Principal Global risk or for short term
Opportunities Series and utilises the same fundamental pro!teering fails to
discretionary investment process that the Group uses capture the true value
to manage its other active absolute return portfolios. It add of the asset class.” NICK LYSTER

Uncertain times call for specialised
currency risk management.
We are one of the world's foremost currency risk managers, offering the benefits of a risk-based approach to currency
management from our headquarters in London and offices in New York, Sydney and Tokyo. With nearly two decades
of experience and about US$46 billion of exposures and assets under management, we are an established name in
institutional currency management, providing:
Active Currency Hedging | Specialist Currency Alpha Strategies | Multi Strategy Programmes
Our balance of investment expertise and academic excellence is designed to maximize returns while controlling risk.
For more information, please contact:

Jonathan Lubran Arnaud Gérard, CFA ®
+44 207 163 2679 +44 207 163 1102

jonathan.lubran@bnymellon.com arnaud.gerard@paretopartners.com
www.bnymellonam.com www.paretopartners.com
This is a financial promotion and is not intended as investment advice. The information provided within is for use by professional investors and should not be relied upon by retail investors. This
document may not be used for the purpose of an offer or solicitation in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or not authorised. The value of investments
and the income from them is not guaranteed and can fall as well as rise due to stock market and currency movements. When you sell your investment you may get back less than you originally
invested. To help us continually improve our service and in the interest of security, we may monitor and/or record your telephone calls with us. Assets under management are as at 30 September
2010. This document is issued in the UK, mainland Europe (excluding Germany) by BNY Mellon Asset Management International Limited. BNY Mellon Asset Management International Limited,
BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1118580. Authorised and regulated by the Financial Services Authority. In Germany, this document is
issued by WestLB Mellon Asset Management Kapitalanlagegesellschaft mbH, which is regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht. WestLB Mellon Asset Management was
formed as a 50:50 joint venture between The Bank of New York Mellon Corporation and WestLB AG. In Singapore, this document is issued by The Bank of New York Mellon, Singapore Branch for
presentation to professional investors. The Bank of New York Mellon, Singapore Branch, One Temasek Avenue, #02-01 Millenia Tower, Singapore 039192. Regulated by the Monetary
Authority of Singapore. In Dubai, United Arab Emirates, this document is issued by the Dubai branch of The Bank of New York Mellon, which is regulated by the Dubai Financial Services
Authority. If this document is used or distributed in Hong Kong, it is issued by BNY Mellon Asset Management Hong Kong Limited, whose business address
is Level 14, Three Pacific Place, 1 Queen’s Road East, Hong Kong. BNY Mellon Asset Management Hong Kong Limited is regulated by the Hong Kong
Securities and Futures Commission and its registered office is at 6th floor, Alexandra House, 18 Chater Road, Central, Hong Kong. In Korea, this document
is issued by BNY Mellon AM Korea Limited for presentation to professional investors. BNY Mellon AM Korea Limited, 21/F Seoul Finance Center, 84
Taepyungro 1-ga, Jung-gu, Seoul, Korea. Regulated by the Financial Supervisory Service. BNY Mellon Asset Management International Limited, Pareto
Investment Management Limited and any other BNY Mellon entity mentioned are ultimately owned by The Bank of New York Mellon Corporation. In New
York and Sydney Pareto operates through FSA Representatives, Pareto New York LLC and Pareto Australia Pty Ltd. CP5757-28-09-2010(3M)
Citi launch platform for Db x-trackers
Funds of Hedge Funds launches
Currency
C
iti have announced that its Global Transaction
ETFs
Services unit has launched a global technology
platform speci!cally designed for servicing
D
funds of hedge funds. The new service, which integrates
into Citi’s Global Operating Platform for Hedge Fund b x-trackers
Services, enables Citi to provide a comprehensive has entered
suite of fund of hedge fund solutions through a single, the currency
seamless front-to-back online service. exchange traded
fund market with
“For the bene!t of servicing fund of hedge fund managers the launch of two
around the world, we have pulled together the entire products. The db
client experience under one seamlessly integrated, x-trackers Currency MANOOJ MISTRY
globally consistent platform,” said Neeraj Sahai, Global Returns ETF comes
Head of Securities and Fund Services, Citi. “Managers in a sterling and a US dollar-hedged version and takes
have direct, on-line access to our custody services,
long and short positions in the G10 currencies, which
our suite of middle-of!ce solutions and all standard
include the Australian, New Zealand and Canadian
administrative reports, resulting in greatly improved
dollar, Swiss franc, euro and Norwegian krone.
ef!ciency, accuracy, transparency and risk mitigation.”
Citi’s fund of hedge fund services product suite delivers Manooj Mistry, head of db x-trackers ETFs UK, comments:
the following types of customized tools for portfolio ‘The Currency Returns ETF is ideal for investors who
managers: are increasingly recognising the bene!ts of allocating
assets to investment classes that show low or negative
• analysis of liquidity terms of underlying hedge fund performance correlation with equity and bond markets, as
investments well as investors looking for an additional way to achieve
• ability to track and analyze underlying fund alpha in a low-growth environment.’ The ETFs are linked
performance to the DB Currency Returns Index, a benchmark that db
• “what-if” trade scenario analysis x launched in 2007 to take advantage of the long-term
• pre and post trade compliance reporting against returns that it says can be found in the currency markets.
investment guidelines Deutsche Bank historical analysis claims that that over
• real-time dynamic NAV reporting the long term an investment in the DBCR will outperform
• automated FX hedging functionality for share classes an equivalent investment in global bonds or equities on a
denominated in non-base foreign currency risk-adjusted basis.
Nomura launches currency fund to

harness Chinese growth
N
omura has launched the Nomura C10 Fund, a Jean-Philippe Royer, head of the Fixed Income Fund
regulated currency investment product, which Solutions Group at Nomura.
aims to provide investors with directional
exposure to Chinese economic growth.The Nomura Nomura’s C10 Currency Strategy is designed to capture
C10 Fund is the latest development in Nomura’s UCITS the return of currencies which are best positioned to
compliant products suite. Its investment objective bene!t from Chinese growth and Yuan appreciation
is to provide investors with direct exposure to the based on their country’s exposure to China. Developed
performance of Nomura’s C10 Currency Strategy. by Nomura’s FX Research and Structuring teams, the
dynamic, rules-based strategy takes long positions in 10
“Investors seeking to participate in the China growth liquid currencies with the highest trade exposure to China
story have, up until now, had little choice but to suffer as measured by the ratio of exports to China versus Gross
from the usually high volatility and the lack of liquidity Domestic Product (GDP). The fund offers daily liquidity
and transparency associated with exposure to China. and is available in EUR, with USD and GBP-hedged share
The Nomura C10 Fund is a unique opportunity to classes accessible to institutional and retail investors. It is
harness China’s economic growth in a liquid, ef!ciently currently approved for public distribution in Ireland and
risk managed and UCITS compliant investment,” said is being registered across all major European countries.

NEWS
Record appoints new CEO

Fund/SERV to provide
R
ecord plc, the specialist
multi-currency settlement
currency manager,
has announced the
appointment of James Wood-
for global funds Collins as Chief Executive

Of!cer, taking on this position
T
from Neil Record, who has been
he Depository Trust & Clearing Corporation both Chairman and CEO since
(DTCC) announced its plans to introduce the IPO in 2007.
multi-currency settlement for European
investment fund transactions through its Fund/ Mr. Record will remain as
SERV suite of services. This service, which Chairman, in an executive
is subject to regulatory approval and will be position to which he will
available by early 2011, streamlines how offshore commit four days a week.
fund transactions are handled, giving the He will continue to play
nearly 10,000 European investment funds the an active role with clients,
opportunity to expand their distribution networks investment consultants
across borders while signi!cantly reducing and other external
JAMES WOOD-COLLINS
processing challenges. parties, as well as
maintaining his involvement with
The new service will be offered through a Record’s products and product development. Mr Wood-
new DTCC subsidiary called DTCC Solutions Collins joined Record from J.P. Morgan Cazenove in 2008,
Worldwide Ltd. and settlement will now be and has led Record’s client team since December 2009.
available in Euros and pound sterling in addition to
U.S. dollars. The business unit overseeing the cross-
Barings appoints
border service will have of!ces in London, making
it a centrally located facility for global funds
Currency Fund manager

processing. DTCC will also establish a best-practice
users’ group to ensure that the new multi-currency
platform continues to meet the needs of customers.
B
“Fund/SERV’s multi-currency platform aring Asset Management has appointed Thanasis
enhances Fund/SERV’s Petronikolos as a Director in the Fixed Income and
suite of offshore Currency team, responsible for managing exposure
fund processing across the !rm to Emerging Market Debt and Currencies.
capabilities,” This includes managing the new Baring Emerging
said Annemarie Markets Debt Local Currency Fund.
Gilly, DTCC vice
president and Thanasis is based in London and reports to Alan Wilde,
head of Global Head of Fixed Income and Currency at Baring Asset
Mutual Funds. Management. Thanasis has over 15 years’ investment
“Our ability to management experience
settle fund trades in emerging market !xed
in Euros and income and currencies.
pound sterling He was previously a
will !ll a long- Fund Manager at RAB
standing void Capital, responsible for
in global funds investment decisions
processing for the emerging market
as well as debt and currencies
substantially component of the RAB
reduce Emerging Market
processing Opportunities Fund.
fees and Prior to this he held roles
handling costs managing emerging
for market market debt at Avebury
participants.” Asset Management
ANNEMARIE GILLY
and Rothschild Asset THANASIS PETRONIKOLOS
Management.

Hancock launches
JSE Currency Strategies fund
launches
J
ohn Hancock Funds has
Currency
announced its fourth new
fund launch of the year,
the John Hancock Currency
Index
Strategies Fund (JCUAX). The
new fund is now available for
sale to retail investors through
ALLAN THOMSON their !nancial advisers.
T
he JSE has unveiled its Rand Index (Rain), a The decision to develop
currency index that can be used by asset managers, and launch the new
economists, importers, and exporters as a tracking fund grew from
and forecasting tool to determine the rand’s strength lessons learned in the
against a basket of currencies. aftermath of the 2008
market turmoil, said
The Rain, which tracks the movement of the rand John Hancock Funds
against the currencies of South Africa’s top !ve major President Keith F. KEITH F. HARTSTEIN
international trading partners - the euro, US dollar, Hartstein.The John
Chinese yuan, UK pound, and Japanese yen - provides Hancock Currency Strategies Fund seeks to generate
a public benchmarking tool, it said. The representative positive returns over all market cycles by making
weight of each currency in the index will be calculated diversi!ed investments in global currencies in order to
using audited import and export data of physical goods take advantage of market anomalies. The Fund primarily
obtained from the SA Revenue Service, data which is only uses short-term forward currency contracts on developed
available two months in arrears. market currencies to achieve its goals.
“We believe the Index will be particularly useful to “Once we identify an investment strategy that we believe
those users wanting to measure the competitiveness of will !ll a need in the market, our unique sub-advisory
South African goods in international import and export business model affords us the luxury of seeking out
markets,” said JSE director, Allan Thomson. The RAIN best-in-class institutional asset managers to manage that
will be calculated and distributed daily by the JSE at strategy,” added Mr. Hartstein
15h00 and 17h00. A review of the inclusion of each of
the !ve currencies and changes in individual currency The sub-adviser to the fund, investment management
weightings will take place annually at an index review. !rm First Quadrant, manages approximately $6.3 billion
The JSE will then communicate any changes to currencies in currency strategies and is the general partner of
that make up the index or their weighting to the market. Af!liated Managers Group.
TD AMERITRADE Institutional launches UMAX

T
D AMERITRADE Institutional has launched allowing advisors to spend more
a new Uni!ed Managed Account Exchange time on business development
(UMAX), which expands the types of investments and serving clients. However,
independent registered investment advisors (RIAs) advisors working with UMAs
can offer to clients and provides more "exibility in have been limited by rigidity and
how the portfolios are managed. The UMAX platform lack of investment options,” said
revolutionizes uni!ed managed accounts (UMAs) by Matt Judge, director of product
providing two distinct investment management solutions. management, TD AMERITRADE
An open architecture approach in which advisors can Institutional. “With its open
construct solutions from a large universe of products architecture and comprehensive
using their own research and product selection strategy, product access, UMAX aims
and a bundled option that includes robust product to provide advisors with
research and asset allocation guidance from leading the added "exibility and
third-party investment managers. “As RIAs continue to investment choice to help
demand more "exibility and ef!ciencies to streamline the them respond to today’s
MATT JUDGE
investing process, UMAs have become a go-to solution volatile markets.”

Currencies - still the
most liquid and tradable asset
market in the world
By Diana Ples and Bhavesh Trivedi at Record Currency Management
The latest Triennial Survey of the Foreign Exchange and Derivatives Market, published by
the Bank for International Settlements this September, con!rms that volumes traded daily on
the foreign exchange market are now past the $4 trillion mark. Three years after the onset of
the !nancial crisis, the foreign exchange market is now above pre-crisis levels of trading. This
is a testament to the market’s fast pace of recovery, as much as it is a testament to its resilience
during the crisis period. Indeed, the currency market continues to be the most liquid and
tradable asset market in the world, with daily turnover estimated to be more than seven times
the daily turnover of global equities.1
1. Estimate by Citi Group, FX, September 2010

Currencies – still the most liquid and tradable asset market in the world
W
hilst the foreign exchange market is now We believe that the growth in spot and forwards
larger than ever, it has not fully returned could also be credited to the recovery of cross-border
to its pre-crisis patterns. This, we believe, capital "ows and international trade. Thus, the
may be indicative of trends to come, with some of the BIS reports that foreign exchange activity has now
changes here to stay. We have identi!ed the following become more global, with cross-border transactions
main themes which we believe represent the most representing 65% of total activity, up from 62% in
salient features of the FX market today: April 2007.
Although we saw a slight decline in options turnover

1 High increases in spot transactions and and little change in the volumes of swaps traded
subdued interest in other instruments since April 2007, investors should rest assured that
2 A concentration in the geographical these instruments are still liquid and widely traded.
distribution of trading with the UK
strengthening its dominance
Geographical distribution
of turnover
3 Changes in the market shares of the top
traded currencies, the Australian Dollar
overtaking the Swiss Franc in volume traded
In April 2010, banks in the UK increased their
4 The continued rise of emerging markets geographical dominance of the foreign exchange
market, with Switzerland and Germany in particular
losing out. As expected, the US stayed in second place
Instruments
in terms of trading activity, with its growth of daily
volumes re"ecting growth in the market as a whole.
Over 90% of the 20% increase in daily turnover, Japan has regained its third place and Singapore has
since the last Triennial Survey was published in now overtaken Switzerland in fourth place. This,
2007, is attributable to the growth in the turnover of together with a 30% increase in volumes traded in
conventional spot transactions and outright forwards. Hong Kong, point to increasing market activity in
At the same time, we saw a subdued increase in the Asia.
turnover of currency swaps and foreign exchange
swaps, and an actual decline in the volumes of As the geographical distribution of trading changes,
options traded. This may be symptomatic of a investors should consider where the deepest pools of
decreased demand for exotic structured products, liquidity are in order to ensure optimal execution of
as traders reverted to more traditional instruments trades.
following the
!nancial crisis.
To some extent,
the 48% jump in
turnover of spot
transactions may
also be due to the
rise of algorithmic
trading – where
black boxes can now
process thousands
of trades per minute
– and to the rise
of online platform
trading, which has
enhanced the appeal
of retail trading by
Share of the market volume traded in each instrument
adding functionality Chart 1: If we look at the share of the total market value traded in each instrument over time, we can see that spot
and accessibility. transactions and outright forwards have become more popular amongst market players.

LEADER
In addition to changes in G10, we also saw increased

trading activity in some of the emerging market
countries such as Turkey, Brazil, China, Malaysia
and the Philippines. On the one hand, this re"ects
increased investor interest in emerging markets. On
the other hand, we believe that – in the case of Turkey
and China at least – increased activity in April 20102
may be indicative of central bank interventions in the
market. In April, the Turkish Central Bank increased
the proportion of foreign currency reserves, which
banks must deposit to cover loan risk, in a !rst step
to withdraw some of the liquidity it inserted into the
market; whilst China continued to increase its foreign
currency reserves.
Overall, therefore, London retains its dominance, but

we expect the continued rise of emerging markets,
and !nancial centres in Asia in particular, to weaken
this dominance over the years to come.
“We believe that

Changes for G10 volumes traded in the
Australian Dollar
The currency composition of turnover, also re"ect the fact
as expected, has not varied substantially that Australia has
from the composition reported three years maintained relatively
ago. Whilst the Dollar has continued high interest rates,
its slow decline in proportional daily making the currency
turnover (a pattern that we have observed a favourite amongst
over the past decade), it remains the carry players.”
dominant currency in the market. There
were noticeable increases in the volumes BHAVESH TRIVEDI
of Euro and Yen traded, and a big decrease in the
daily turnover of the Pound Sterling. As the Yen is The most prominent change was the Australian
traditionally considered to be a safe haven currency, Dollar’s rise to the top !ve most traded currencies,
the Yen’s rise in market share is probably due to overtaking a declining Swiss Franc. The Canadian
increased risk aversion following the !nancial crisis. Dollar too showed a notable 23% rise in turnover.
2. The survey is constructed by collecting data about

market activity during the month of April, every
three years.

Currencies – still the most liquid and tradable asset market in the world
The rise in the Australian and Canadian Dollar

may re"ect recovering appetite for commodities. In The rise of Emerging
particular, April 2010 saw the price of gold rise by
just under 6%, which may have contributed to the Markets
appreciation of the Australian Dollar against the US Whilst the market share of G10 currencies as a
Dollar, thus stimulating the increase in turnover. group stayed similar to 2007 levels, we saw a slight,
but steady increase in the market share of the 23
We believe that volumes traded in the Australian emerging market currencies in the survey. The most
Dollar also re"ect the fact that Australia has signi!cant increases were for the Turkish Lira and
maintained relatively high interest rates, making the Korean Won, followed by the Russian Rouble,
the currency a favourite amongst carry players (i.e. Brazilian Real, India Rupee and Malaysian Ringgit.
investors who buy higher yielding currencies and
sell lower yielding ones with the aim of capturing the The Korean Won’s 30% increase in market share
interest rate difference). has now put it above the Norwegian Krone and
Singapore Dollar, becoming the most actively traded
It is also possible that a portion of the Australian emerging market currency. This may be associated
Dollar’s rise in turnover is due to increased merger with FTSE’s promotion of South Korea to developed
and acquisition speculation in April 2010, as market market status in September 2009. Whilst South Korea
players were speculating about the takeover of a is now considered to be a developed market from
couple of US companies by Australian businesses. the point of view of equity investors, its currency,
Thus, any speculation and ensuing pre-emptive we believe, still shows characteristics of an emerging
market. In particular, it is only tradable offshore
hedging might have had a one-off effect on hedging
via non-deliverable products, creating a disparity
volumes.
between onshore and offshore rates.
As well as changes amongst the !ve most traded
The Turkish Lira has shown staggering progress,
currencies, we saw a drop in the market share of
nearly quadrupling its market share since April
Scandinavian currencies. Whilst this decrease in
2007. This is re"ective of the Turkish Lira’s upwards
market share was not re"ected in a decrease in
path over the last decade. As one of the highest
turnover for the Swedish Krona, Norwegian Krone
yielding emerging market currencies, we would not
volumes have actually decreased since 2007.
be surprised if the increased market activity in the
Turkish Lira is due to carry players.
To some extent, this may be to do with the fact that
these currencies have come much closer to “fair
We believe that the increase in the market share
valuation” levels against the Euro since the credit of key emerging market currencies serves to
crisis, becoming a less appealing opportunity for strengthen the view that emerging markets are
fundamental players. Furthermore, we have seen a becoming increasingly more appealing and accessible
decrease in hedging by Scandinavian exporters as to investors world-wide. Subdued growth and
order "ows have been hit since the credit crisis. collapsing interest rates in the developed world as a
result of the !nancial crisis are increasing the appetite
One of the upshots of the decline in the market for investments into emerging markets in the search
share of Scandinavian currencies is that banks could for enhanced returns. Indeed, the latest estimate from
become less keen on these currencies and this could the Institute of International Finance is that over
have an impact on liquidity. For investors, this $800bn will "ow into emerging markets over the
will highlight the importance of having diversi!ed course of the year, a 40% increase from last year.
counterparties, as the execution capabilities of banks
and managers vary even within the G10 universe. We at Record also think that investors can pro!t from
the high rates of growth in emerging markets by
As emerging markets and other countries continue allocating a portion of their risk budget to emerging
to diversify away from the US Dollar, we expect the market currencies. There are good long term reasons
gradual proportional decline in US Dollar traded for holding emerging market currencies. As emerging
volumes to continue over the coming years. Indeed, market countries become richer, their currencies are
this is already re"ected in the currency composition expected to become stronger, converging in value
of country reserves, as published by the IMF. with those of developed countries. We have already

LEADER
Thirdly, an emerging markets currency portfolio

would be signi!cantly less volatile than an equity
portfolio, hence investors could bene!t from growth
in emerging markets without incurring as high levels
of risk. Indeed, as the more recent period has shown,
emerging market currencies are not signi!cantly
more volatile than developed market currencies.
Whilst G10 currencies still dominate the market, the

continued growth in the market share of emerging
market countries highlights increased investor
interest in emerging market assets.
We believe that emerging markets
“We believe that are going to become a much more
the increase in the prominent feature of the investment
market share of key world over the next few years and
emerging market
that there are considerable long-term
currencies serves
bene!ts to holding emerging market
to strengthen the
currencies. In particular, as the events
view that emerging
of the past weeks have unfolded, we
markets are becoming
increasingly more have seen emerging markets come
appealing and under increased pressure to allow
accessible to investors their currencies to appreciate to match
world-wide.” the pace of economic growth. This, we
believe, is only a natural consequence
of their stronger fundamentals and, in
many cases, historic undervaluation.
DIANA PLES
seen this effect taking place in some emerging market Conclusion

economies; the path of the Korean Won – which is Conditions in the foreign exchange market have
now the most traded emerging market currency – varied a lot over the last three years; from the
serves as a good example. We believe investors can liquidity crisis following the banking crisis to higher
generate high returns by exploiting this upwards levels of trading now than ever before, the currency
trend in emerging market currencies. world has had a rough ride. Nevertheless, the
rebound in turnover seems to indicate recovery.
Furthermore, we think that emerging market
currencies are a better engine for bene!ting from The size, accessibility and liquidity of the foreign
emerging markets growth than other asset classes. exchange market increases the appeal of currency
for investors looking to diversify their portfolios
Firstly, our research shows that for equities as well as and to reduce their reliance on more traditional
bonds a signi!cant part of the returns is attributable asset classes. Nonetheless, even within developed
to the currency component – as investors bene!t from market currencies, differences in liquidity between
currency appreciation against their base currency. For instruments, trading locations and even G10
equity returns, for instance, we estimate the currency currencies mean that investors should ask their banks
return to be between a third and a half of the total and managers tough questions about transaction
unhedged return (depending on the starting point of execution.
the analysis and an investor’s base currency).
With the slow recovery of developed economies,
Secondly, the currency market is signi!cantly more we encourage investors to explore emerging market
liquid than both the stock and bond market, which currencies. This re"ects increased interest in emerging
means that investors will be able to trade emerging markets as an investment opportunity and allows
market currencies easily, at low costs and without investors to bene!t from the fast pace of growth in
having an impact on their market value. these economies.

The New Normal -
de!ning Alpha in
Currency Management
By Dr. Momtchil Pojarliev, CFA, Director and Senior Portfolio Manager,
Hathersage Capital Management LLC
Since the 1990s, institutional investors have been allocating resources less toward
traditional assets like equities and bonds, and more towards alternative investments
like hedge funds, real estate, private equity, currencies and commodities. This strategy
was partly the result of a conventional belief that diversi!cation is the key for successful
investing and that the returns on alternative assets will have little or no correlation with
returns on traditional investments. Unfortunately, during the !nancial crisis, investors
discovered that correlations vary and that average correlations could be misleading.

CURRENCY MANAGEMENT
I
n turbulent markets, all asset
returns generally become
more volatile and more
highly correlated. For example,
the correlation of hedge funds to
global equities is 4% when global
equities produce returns greater
than one standard deviation above
their mean return, but it rises
to 80% when equities generate
returns more than one standard
deviation below their mean (see
Fig 1). Thus, diversi!cation tends
to fail exactly when it is most
needed, i.e. in falling markets. Figure 1: When MSCI World Index Monthly returns <= -1STD
Do currency managers provide “real” diversi!cation well as to pro!t from tactical foreign-exchange views.
to investors with large equity exposure? Talking
about currencies to institutional investors reminds Institutional investors should !nd the right point
me of one of the most famous baseball comedy acts, along the Alpha Continuum, depending upon
a humorous exchange between Bud Abbott and Lou their speci!c needs. When the primary concern
Costello: “Who’s on !rst, What’s on second, I Don’t is to eliminate currency risk embedded in foreign
Know is on third…” The confusion arises from the investments, a passive currency management product
peculiar names of the ball players. But what explains is most appropriate. When the primary concern is
the confusion about currency investing? to increase the return on their portfolio, a currency
alpha mandate could be more suitable. However,
One of the most confusing things about currency one of the challenges for institutional investors after
investing is that every currency mandate is unique. allocating assets to currency managers is to !nd an
The easiest way to differentiate between currency appropriate benchmark to gauge the performance of
investment mandates is to look at the expected excess these managers. While evaluating passive mandates
return, or the Alpha Continuum1. Let’s take as an is a simple exercise, gauging the performance of
example a USD based investor, who wants to allocate alpha mandates is more challenging. Without an
USD100 million to global equities, but does not want appropriate benchmark, the investor cannot know if
exposure to foreign currencies. In this case, a currency he should be pleased or disappointed with the results
achieved by his managers, or put differently, if these
mandate could be to simply hedge the foreign
managers have demonstrated true skill or not. The
currency exposure (sell the local currencies versus
lack of a well-established benchmark may be one of
the US Dollar). The expected excess return of such
the reasons why allocations to currency strategies are
a mandate is zero; the objective is only to remove
still relatively low compared to other asset classes.
currency risk. This is passive currency management.
Is the benchmark zero or

In contrast, let’s assume an institutional investor, who
has an USD98 million allocation to global equities
and has used the remaining 2% of its assets to a cash
margin account to invest in a currency alpha mandate something different?
with USD20mn notional exposure. The objective of Traditionally, the benchmark for an unfunded
such a mandate could be to generate a 15% return currency manager (someone who is trading only on
with volatility of 20%. In this case, the expected alpha credit lines while core assets are invested elsewhere)
is obviously quite large. Currency overlay is another has been zero, while the benchmark for cash
typical example of a currency management mandate funded mandates has been the risk-free rate. Such
and it falls somewhere between the two previous benchmarks imply that all the returns generated
examples on the Alpha Continuum. The prime by currency managers are alpha returns and beta
objective of a currency overlay is to limit the risk from returns are assumed to be zero. However, !nancial
adverse movements in exchange-rates, i.e. hedge, as market theory2 tells us that the return of any portfolio
1. Anson (2008) introduced the term Beta Continuum and shows that beta is not a point estimate, but rather there is a range of risk premium capture that can be described
as beta. The term Alpha Continuum should highlight that alpha might not be just a simple point estimate, but should re"ect the objectives of the speci!c mandate.
2. Waring and Siegel (2006) show that the returns of any portfolio can be broken down into market (beta) components and an alpha component. Currency fund returns
offer another example of this principle.
The New Normal - de!ning Alpha in Currency Management
on earlier hedge fund research, and several

“Institutional well-known currency trading strategies,
investors should Pojarliev and Levich3 (PL, 2008a)
!nd the right propose four potential factors that could
point along the explain currency returns generated by
Alpha Continuum, professional managers. These four factors
depending upon their
are transparent, easily replicated trading
speci!c needs.”
strategies within the currency domain:
• Carry – Borrowing a low interest rate currency

and investing in a higher interest rate
currency.
• Trend following – Borrowing in a
depreciating currency and investing in an
appreciating currency.
• Value – Borrowing in an overvalued currency
and investing in an undervalued currency.
• Volatility – Re"ecting the impact of currency
volatility on trading returns.
Pojarliev and Levich use a 4-factor regression model

DR. MOMTCHIL POJARLIEV, CFA
as a technique to gauge the performance of currency
managers. The model estimates what portion of
should have a beta and an alpha component. The currency trading pro!ts is due to exposure to these
beta component captures the systematic relationship speci!c trading style or risk factors (or beta), and
between returns and the special factors driving what portion is due to skill, or alpha. PL (2008a) and
returns. For currencies, the beta might stem from PL (2008b)4 use different proxies for the risk factors,
exposures to risk factors or trading styles similar to but the results are strikingly similar. Depending on
how the arbitrage pricing model relates returns on the time period, periodicity, and model speci!cation,
equities to factors representing large vs. small cap four risk factors explain 50-75% in the variability of
!rms, value versus growth !rms, etc... currency fund (index) returns. A signi!cant part of
currency returns comes from exposure to a small set
In order to recognize currencies as an asset class, of factors that proxy the returns from well-known and
there should be factors that correlate with or explain easily implemented trading styles. What is sometimes
patterns of currency fund manager returns. Building labelled as “alpha” is really more beta.
Why should institutional

investors be concerned
about how much of
the currency return is
alpha and how much
is beta? First, proper
return attribution could
lead to some re-pricing
for “active” currency
products. Investors should
not pay alpha fees for
exposure to currency style
betas that could be earned
more cheaply. Second,
currency beta might be
Figure 2 less suited when the goal
3. See “Do Professional Currency Managers Beat the Benchmark?” Financial Analysts
Journal, vol. 64, No. 5, pp: 18-30, Sep/Oct 2008]
4. See “Trades of the Living Dead: Style Differences, Style Persistence and Performance of
Currency Fund Managers, Journal of International Money and Finance, forthcoming
is to diversify global equity exposure. For example, classes are likely to be lower, while currency alpha
the correlation of carry beta to global equities is -9.3% mandates offer an alternative source of return, which
when global equities produce returns greater than can be added on top of any investment portfolio.
one standard deviation above their mean, but it rises Second, future volatility is likely to be higher; the
to 28.5% when equities generate returns more than outlook is “unusually uncertain7“, while currency
one standard deviation below their means5. Thus, alpha mandates offer uncorrelated return, which
carry beta diversi!es when it is not needed, i.e. in will lower the volatility of the portfolio. Third,
rising markets and it provides no diversi!cation diversi!cation might work less than expected
when it is most needed, i.e. in falling markets. Even and should be complemented with tail hedging.
though the recession caused by the !nancial crisis For example, Figure 2 shows the performance of
of!cially ended in June 2009, the global economic different asset classes in periods of market stress and
outlook is still uncertain. PIMCO calls this the “New highlights that diversi!cation often fails when it is
Normal6,” a world in which growth prospects may most needed. Investors should consider managers
be lower and long-held assumptions about portfolio with investment processes designed to bene!t from
allocations are being challenged. For example, many periods of market dislocation.
institutional investors still assume that asset returns
on their investment portfolios will average 8% over Many questions remain open. First, how does
the long-term future. With the investment grade bond one choose the right managers? Second, is past
market yielding only 2.5% and nominal GDP growth performance any indication for future performance
of 2 to 3% this assumption is increasingly coming (are alphas persistent)? Third, are investment styles
under pressure and alternative sources of return are (beta exposure) persistent? Fourth, do currency
needed more than ever. managers provide true diversi!cation to institutional
investors with large equity exposure? We will
The New Normal

address these questions in future issues. The dialogue
between managers and investors does not have
What does the New Normal means for institutional to resemble the humorous exchange between Bud
investors? First, future returns from traditional asset Abbott and Lou Costello.
5. These correlations are based on monthly return of the MSCI World Index (in local currencies) and the FTSE Currency Forward Rate Bias Index
(Bloomberg Ticker FRB5USDE) from January 1980 until September 2010. Correlations computed using different proxies for currency beta exhibits similar pattern.
6. El-Erian, Mohamed A. (2009). “A New Normal,” Secular Outlook, PIMCO, May 2009
7. Bernanke (2010).
3. Personal investments - Fine Even Euro trades like an

30 SECOND FOCUS
Art or Gold? emerging market when you

Please God make me invest in need to get out of a position.
another !eld next time.
10. Dom Perignon or Krug?
Art, whatever.
Dom Perignon or Krug - just
4. Food - Meat or Vegetable? give me lots of it please.
MEAT.
11. Mozart or Rolling Stone?
5. Systematic or Discretionary? Rolling Stone.
Next time. As systematic
12. Volatility - Risk or
as can be. Call me for my
Opportunity?
paycheck.
NAME: FREDERIC BETTAN It use to be a bigger
JOB: MANAGING PARTNER 6. Motor Racing or Lawn opportunity.
AT SWING CAPITAL Tennis?
13. Early bird or Night owl?
Kite sur!ng in Tahiti.
1. Holidays - Sun or Snow? Early bird.
Sun - I live in Canada, we have 7. Trading preference - Dollar
14. Research approach -
enough snow. or Yen?
Technical or Fundamental?
Try trading CAD in European
2. Stick to the Trend or catch Technical.
or Asian hours. Good luck!!!
the correction? 15. FX - Asset class or
Catching the correction has 8. Lifestyle - Town or Country?
Commodity?
become harder than before. Town, Town, Town.
Virtual Asset: Now you see it -
When I grow up I think I want 9. Majors or Emerging Now you don’t!
to be a Trend follower. Markets?

Timing: - just how
important is it for
achieving currency alpha?
By Gerry O’Kane
Within the equities world there has been some discussion over whether market timing is
a viable investment strategy or simply a form of gambling based on chance. The argument
goes that prices might exhibit the ‘random walk’, a mathematical concept of a trajectory
made up of random steps, but that sooner or later the ef!cient-market hypothesis will kick
in and things will rebalance. Of course whether this is correct or not, it still means there
are opportunities for those who spot the opening. It also raises the question yet again of
whether currency markets have innate inef!ciencies that bene!t the shrewd trader, not
a view that everyone accepts. Then there is the issue of alpha versus beta. That hoary old
question of what is alpha comes to the surface again, especially when judging whether
particular styles in"uenced by timing behaviour are providing true alpha or a form of beta.
W
“ hen looking at the currency market right to differentiate and outperform those simple naïve
now and its evolution, you can say its strategies.” Does this then turn them into alpha
fundamentally based upon four obvious generators?
styles - the carry model, the trend model, the relative
value model incorporating things like purchasing “I think there’s no doubt that people are looking for
power parity (PPP) and volatility,” says Jay Moore, alpha in these styles but with a form that is properly
managing director, State Street Global Markets. When uncorrelated, that does diversify a portfolio and does
discussing the topic of timing and alpha generation, not get caught in the downside that affects other
you therefore !rst have to examine what is beta and investment strategies that we’ve seen over the last
alpha, with some consultants proposing that the true couple of years,” says Chris Brandon, managing
carry trade should be seen as de!ning beta. director, Rhicon Currency Management, Singapore.
And he accepts that with the right way of moving
According to Moore, “Investors perceive the carry between styles and risk management, along with the
trade or trend trade as ‘naïve’ strategies, which innovative use of operational systems, alpha elements
they should be able to get through index funds can be returned.
or exchange traded products and are increasingly
identifying these as sources of beta rather than alpha. Alpha is generally seen as adding value, increased
The challenge for currency managers is to exploit performance, over a benchmark or de!nable element.
these styles and data sets in unique ways in order For others it is identi!ed as the managers skill.

CURRENCY MANAGEMENT
Need for experience currencies interact with underlying assets. These are
key factors if you are trying to predict the behaviour
“Experience of the manager is critical to performance and timing of the market, making for a better fund
and in my view, things that I’d be concerned about manager” agrees Mark Farrington, Head of Macro
if I was an investor and a question I’d ask, is, does Currency Group.
the manager invest in his own strategy. Do they
truly believe in themselves? For me that would be Taking stocks, if one built a portfolio based on the
a necessary condition for me to invest,” observes FTSE 100 Index but had elements of divergence,
Brandon. leaving out certain companies, adding in others and
increasing or decreasing percentage values relative
“Of course it is necessary to have experience along to the Index and it outperformed the FTSE, have I
with a deep understanding of the market and how created alpha?

Timing: - just how important is it for achieving currency alpha?
“At that point they would switch styles or reverse

their carry positions. It’s an interesting development
but also poses an interesting question, which is if all
the managers develop risk aversion indicators how
valuable is that, will it then re"ect beta?”
He accepts this can become a little

philosophical, a case of when is an ‘it’ an
“Investors perceive
‘it’?
the carry trade or
trend trade as ‘naïve’
strategies, which According to Thomas Suter, CEO of
they should be able Swiss-based Quaesta Capital all of the
to get through index common strategies can provide returns
funds or exchange but not if followed exclusively and
traded products and rigidly. “Most styles depend too much
are increasingly
on the underlying market environment.
identifying these as
Take the example of the carry strategy
sources of beta rather
than alpha.” – it did very well until summer 2007.
For about two years after, following
the exact same strategy, the investment
manager just lost you money. Does this now mean
that the strategy is wrong? No, it doesn’t really, just
means that it’s the wrong strategy for the certain
environment,” he says.
“On the other side, break out/momentum ‘long

gamma’ type strategies did badly until summer 2007
JAY MOORE and then had a great period throughout 2008, because
suddenly big market activity took place. What does
What if I have taken a view that in a certain market this all tell us? Market timing is crucial!” he adds.
environment large cap or value shares are in a “It’s knowing which strategy does well in a certain
position to outperform the Index, is performance environment and then, on the back of this, over- or
merely re"ecting the beta of value shares or large cap under-weighting certain styles dependent on the
shares, rather than providing alpha? market view for the near future.”
To an extent the level of the debate can become akin

to navel-gazing. How far down the road do you go
arguing that styles and systems are replicable and
Market neutral
consequently should be seen as beta returns. As has While he accepts that market timing is crucial, Suter
been pointed out elsewhere, a comparison of widely raises an additional point: “There are also strategies
used carry indices from different sources will not whose performance generation is market neutral or
show identical returns. market independent. For certain clients it might be
better to encompass those types of strategies – in
Risk aversion models

particular when you choose just one strategy for your
portfolio this should allow you to get a more stable
One development from the fall-out of the carry trade portfolio risk/return pro!le.”
downturn in 2007, has been the development of risk
aversion models. “Many houses with quantitative It’s a view with which Moore agrees. “The carry-style
models are trying to identify periods where risk manager needs to demonstrate that they have the
aversion is very high or where volatility is very high, ability to exploit those risks on the downside and
consequently highlighting where the carry trade is manage portfolios in a diversi!ed way and sustain
likely to do worse,” explains Matthew Roberts, a alpha in the long run, when beta strategies might be
senior consultant at Towers Watson. out of favour.”

CURRENCY MANAGEMENT
A classic example of carry trades providing returns has gone into quantitative and systematic models to
based on timing would have been the Mexican Peso eliminate market timing. In most cases these models
crisis in 1994. To !nance the de!cit a debt instrument have not proven to be that successful,” points out
was launched at a !xed interest rate pegged to the Mark Farrington.
dollar. By the end of 1994 the country did not have
enough dollars to pay out and subsequently devalued He feels one investment style in particular exploits
the peso, but for managers who could see the writing market timing better than any other and is the style
on the wall an early exit or the carry trade or a move adopted by the Macro Currency Group: “I’d say that
to another strategy would have brought pro!t. fundamental discretionary investing relies on timing
more than other styles.”
Of course should you go with the argument that
these models do indeed represent beta returns, rather
than alpha, then the argument may still be made that
market timing provides beta too.
“In both recognising alpha and the importance of

timing, you need to understand why the strategy is
doing well and when it’s under-performing, is that
what you expected?” advises Brandon. And while
returns may increase is this simply a factor
of increasing the risk exposure? “The
questions you must ask are what are the “...things that I’d
differing patterns in the daily returns and be concerned about
can you identify any style drift?” if I was an investor
and a question I’d
ask, is, does the
Market timing manager invest in
his own strategy. Do
“In general, all styles use market timing they truly believe in
to a differing degree and lots of work themselves?”
CHRIS BRANDON

Timing: - just how important is it for achieving currency alpha?
are a lumpy way to get return and often such

opportunities may not be there.”
He also points to other fundamentals: “We look at

everything, no part is excluded. Changes in economic
policies, monthly key economic data releases, changes
in economic outlook are all examples of fundamentals
that will change valuations and you have to be
prepared for them.”
Other market timing events can include

supply shocks, political events and
“I’d say that structural developments, for example
fundamental emerging market growth versus global
discretionary growth. “All these things can be analysed
investing relies on allowing you to take a position prior to
timing more than an announcement to the market. That
other styles.”
way you are a step ahead and can capture
decent movements in currencies before
your competitors.” explains Farrington.
External forces
Jay Moore agrees that these external forces make
currencies unique as as an investment opportunity,
providing you got the timing correct. “This reality is
accentuated by how little of this market is actually
driven by alpha seeking positions,” he says.
He points out that by timing movements in

international equity markets in the short- to
MARK FARRINGTON medium-term, alpha can be gained, helped by
market inef!ciencies. “If Japanese equity markets are
beginning to climb, there will be a lot of Japanese yen
Farrington identi!es several factors that the
orders as foreign players buy shares, this in turn might
industry generally views as being market timing-
also be in"uenced by the Central Banks. Central Banks
speci!c issues: “There are people who look to take
will try to manage currencies based on their priorities,
advantage of excess positions and will therefore
while markets bring other factors to play.”
take a contrarian view, believing the position will be
washed out. It’s frequently cited and used as a metric
And there are other examples of where the
in the industry as being a market-timing issue. I don’t
agree – to me it’s simply taking a view opposite to the fundamentals might exist to suggest a certain
market.” investment approach, but getting the timing right is far
more critical. “With a value strategy that has a strong
And it’s only repeatable attribute is being contrary. element of PPP, the research we’ve done has recorded
Others he is more positive about, and argues that that currencies can extend the cycles of over-valuation
these sorts factors are what separates fundamental or under-valuation relative to their purchasing power
and discretionary styles from those based on quants parity far longer than most investors are likely to stay
and metrics. the length,” observes Moore. “It’s been labelled as a
very long-term strategy, however if the entry points
“As a !rst mover in a market, watching large merger are timed to follow large mis-valuations and the
and acquisition "ows across borders can generate strategy is applied across a broad portfolio of
one-off currency movements which can be exploited”, currencies, such a strategy can perform quite well in
says Farrington. “The problem is that M & A "ows the short term as well.”

CURRENCY MANAGEMENT
outfox their rivals. But, as Farrington pointed out,

quantitative and technical have tried to model the
timing signals.
According to Adam Olive, a co-manager of HSBC’s

GIF Global Currency Fund, a high-frequency
trading strategy can produce alpha too. “The thing
about currencies, is that the number of assets are
comparatively small, so to generate a good
risk-adjusted return in a low turnover
“Many houses strategy,you have to predict where those
with quantitative assets are going incredibly accurately. A
models are trying better way to generate a high Sharpe ratio
to identify periods is to “bet” very frequently but with less
where risk aversion accuracy. You can also cut your positions
is very high or where very quickly, should you need to, if
volatility is very
you have this ability to trade at higher
high, consequently
frequencies.”
highlighting where
the carry trade is
likely to do worse,” It is easy to argue that in order to gain
alpha, timing the market is crucial. Even
when using what might be considered beta
strategies, the secret of their out-performance and of a
manager’s out-performance, is to use these strategies
in differing amounts over selected time periods.
The fact is the optimal mix of strategies, including
fundamental styles, will change through time.
MATTHEW ROBERTS
Producing alpha in this case is all down to

market timing. “It’s knowing
which strategy does
Conclusion
well in a certain
environment and
then, on the back of
Mark Farrington also points out that this, over- or under-
while having solid research in order to weighting certain
identify these market timing events is styles dependent on
important, it is also crucial to have strong the market view for
support systems in place. “It’s critical to the near future.”
be proactive in both style and systems – a
lot of energy is wasted by managers on
minimising costs rather than actual indentifying
these market-timing issues. To take advantage of
market-timing issues and produce decent returns a
manager cannot afford to cut any corners. It should
be no surprise that poor execution or poor timing of
execution can destroy any skill of the manager.”
Of course the concept of timing is usually based

on the presumption of the skill of managers to THOMAS SUTER

Alternative Translation
approaches
Risk
to Currency
Management
International investors hold two types of
currency risk: currency translation risk and
currency alpha risk. Confusion between these
different types of risk can result in signi!cant
currency losses. Currency translation risk is
a by-product of foreign investment. Investors
gain from the diversi!cation bene!ts of holding
foreign assets, but they take on the currency risk Alpha
without any expectation of adding value to the Risk
portfolio. Yet exchange rate movements generate
losses and gains that can have a signi!cant impact
at the total portfolio level. This type of currency
risk is unrewarded: developed market currencies
have no expected return. On the other hand,
currency alpha risk results from positions taken
by the managers of currency absolute return Signi!cance of
or global macro mandates. These managers Currency Risk
are paid to increase the amount of currency The growing pressure on investors to match their
risk in a portfolio. The activity naturally forms liabilities is forcing them to assess how hard their
risk budgets are working. By decomposing risk,
part of the “alternative investments” category. it is possible to compare the expected returns of
However, this activity does not assist in any way each risk exposure. An immediate consequence
the management of the currency translation of considering the risk allocation, as opposed
to the traditional asset allocation, is the sudden
risk. In this article Arnaud Gérard CFA, Head of prominence of currency translation risk. It
EMEA Business Development, Pareto Investment would not be unusual to see a 20% allocation to
Management Ltd, addresses the normal method foreign assets, which results in a 20% exposure
to the movements of foreign currencies. This
of controlling currency translation risk and unrewarded risk can have a major impact at
highlights the challenges and weakness of the total portfolio level. Without mentioning
the credit crisis ‘episode’, the dollar’s strength
de!ning a !xed benchmark and suggests an during 2005 resulted in a 15.8% currency
alternative solution. translation loss on an MSCI EAFE portfolio.

CURRENCY MANAGEMENT
“As the proportion

of foreign investment
rises, currency
translation risk
consumes an ever
larger proportion of
the total risk budget.”
ARNAUD GERARD
This would have caused a 3.2% loss at the total

portfolio level, easily wiping out all alpha generated
by active managers in the entire portfolio. In contrast,
the 19.0% currency translation gain in 2003 would
have created a positive impact of 3.8% on the total
portfolio.
These observations highlight the importance of

implementing a well-de!ned currency hedging
policy at the total portfolio level. As the proportion
of foreign investment rises, currency translation risk
consumes an ever larger proportion of the total risk
budget.
Note that we evaluate risk in terms of the cumulative

loss that can be sustained over a period. This is
very different from simply measuring the standard
deviation of returns as the de!nition of risk. It is quite
common, for example, for currency movements to
generate a 5% loss over the course of a year without
having a noticeable impact on the volatility of
portfolio returns.
A fund’s currency hedging policy has a far greater

impact on investment returns than the alpha
generated by risk-taking managers.

Alternative approaches to Currency Management
The Passive Route & only gains when the base currency is weak, while a
partially hedged position is partially right all the time.
Selecting a Benchmark The simplest approach is to apply a passive (static)
hedge. This has the advantage that it is relatively
Many factors go into the determination of a currency straightforward to implement. However, although
hedging policy, but the subject of this paper is a it reduces currency losses, it equally reduces the
comparison of methods of implementation. So let opportunity to make currency gains, so there is no
us assume that a decision has been taken to adopt expected return from this activity. There is also a cost
a strategic hedge on foreign currency exposure, of implementation and in managing the cash-"ows
acknowledging the fact that, whatever the strategic generated.
stance, it cannot be more than 50% right in the long
term: a fully hedged position is only correct when the Simple mean variance work is often used to help in
base currency rises, whereas an unhedged position deciding what might be the optimum static hedge
outcome once given a set of ‘realistic’
/or expected mean, variance and
correlation characteristics.
In the !rst example, we selected two

simple equity like global portfolios
with long term characteristics for
the unhedged portfolio [mean +10%,
volatility +12%], for the fully hedged
portfolio [mean +2%, volatility +9%]
and the correlation between the two
is -0.2. A 58% hedge ratio is being
recommended to optimise the mix.
By recognising, some uncertainty

All Variable Known
(lack of long term stability) in the
volatility and the covariance of our
initial two portfolios, the results of
the optimisation work will typically
get a broader outcome as shown left.
Already, this simplistic analysis no
longer provides the unique answer of a
58% hedge ratio, but a range from 45%
to 95%.
The recent market turbulence

highlighted the true reality (or stability)
of market/assets characteristics.
By letting all our variables "oat
Variance & CoVariance Unknown (mean, volatility, covariance), the
optimisation results provide a binary
recommendation based on 100 random
iterations – one should either hedge 0%
or 100%! The reality of this scenario is
well illustrated in the bellow chart of
the MSCI World ex EMU index.
With the MSCI index, one can
observe that short term and long term
correlation of market and currency
were relatively stable around -0.6. This
feature dramatically broke down in
2008 onwards.
The with-hindsight optimal hedge

All Variables UnKnown ratio resulting from the above statistics

CURRENCY MANAGEMENT
results in the following chart which

shows an overwhelming preference for
either 0% or 100% hedge position in order
to maximise the information ratio of the
portfolio.
These results undermine the classic

mean-variance optimisation process. The
principal drawback of the traditional
approach is that by assuming that
currency translation risk can be managed
with a passive hedge, it fails to address
the problem that in any particular year
the strategic policy hedge can be precisely
the wrong place to be. Being passively
fully hedged in 2003, would have cost the Source: Datastream, from 31 December 1972 to 31 August 2010. MSCI world ex
total portfolio 3.8%, while an unhedged EMU index unhedged in Euro, MSCI world ex EMU index hedged in Euro.
position in 2005 would have caused a total
portfolio loss of 3.2%.
Active Route to
Mitigate Benchmark
Regret
A pragmatic solution to this benchmark
“regret” is to adopt an active approach
which aims to alter the hedges as the
environment changes. The analysis above
has shown that selecting the middle
ground will guarantee regret and never
represents the optimum situation. There
is no perfect benchmark that satis!es all Source: Datastream, from 31 December 1972 to 31 August 2010. MSCI world ex
constraints all of the time. As a result the EMU index unhedged in Euro, MSCI world ex EMU index hedged in Euro.
static benchmark selected can only be
reached by compromising (regulatory
framework, cash "ows sensitivity, return sensitivity, risk is important for investors whose liabilities are
international exposure size, market outlook etc). denominated primarily in base currency. As the
earlier examples demonstrated, an incorrect currency
In practice, an active approach will respect the hedging policy can result in signi!cant losses at the
recommendation that results in the selection of the total fund level.
strategic/static benchmark, but will lean towards
reducing the negative cash "ows (by decreasing This means that the two types of currency risk
hedges during a weak base currency environment), need to be addressed at two different levels in the
while protecting against a strong base currency by hierarchy of risk budgeting decisions. Currency
increasing the hedges. By varying the hedge in this translation risk must be addressed strategically at the
way there is the opportunity to add value over time, total fund level, whereas the allocation to currency
as well as to improve the risk management of the alpha risk is part of a lower level decision in the
portfolio, and its impact on the funding status and alternative investment’s risk budget. Therefore it
the liabilities of its sponsoring company. is necessary to separate the two decisions, and to
allocate the necessary governance to each.
Having adopted a strategic stance, a currency
Conclusion hedging policy must also address the question of
how that stance is implemented: passively or actively.
Increasing acceptance of the concept of risk Active hedging is a superior alternative to the passive
budgeting, the broader acknowledgement of liability approach, because it allows a skilful active manager
driven investment, and new accounting rules have all to control currency translation losses by adjusting the
prompted new thinking about the way to implement portfolio’s currency hedges towards the ideal stance
currency management. Foreign currency translation in any currency environment.

Currency Fund Operations -
Why not let an administrator take the strain?
In today’s environment two key words are at the forefront of considerations for investors
– liquidity and transparency. Currency shouts those key words, being both transparent
and liquid investment, highly desirable attributes in a post-2008 world. After
experiencing signi!cant losses, liquidations, freezing of assets and exit restrictions,
investors have become far more risk aware and are requiring greater transparency
and accountability in the managers that look after their investments and the
investment products in which they are housed, including, as John McCann
Managing Director of Trinity Fund Administration Limited outlines in
this article, the process of fund administration.
T
he past 18 – 24 months has been a dramatic number of years from an
transformation of the global !nancial investor base principally
landscape. A dramatic destruction of asset consisting of high net-worth
values as well as investor con!dence. individuals and private banks
to one of institutional investors.
The period leading up to the Bernie Madoff affair With this maturation comes an
and then subsequently, has seen a paradigm shift enforced transformation in terms of
within the international asset management industry. operational infrastructure and the
The hedge fund community experienced a massive application of ‘Best Practice’ in the
upheaval as liquidity and credit dried up almost controls and processes of any product
overnight, counter-party risk increased exponentially or service offering, if a currency asset
with the increasing number of large bank failures and manager hopes to raise assets in the
investors naturally "ocked to traditional safe havens post Madoff world!
such as cash and gold.
This requires improvements in
As the world has moved on from Mr. Madoff, there infrastructure for middle- and back-
has been a momentous residue left from his imprint. of!ce operations, enhanced reporting to
The two common themes that ran through the Madoff stakeholders and independent veri!cation
affair and indeed the vast majority of all poster child of portfolio values. Consequently,
hedge fund failures over the past twenty years, the appointment of an independent third party
has been the lack of safe custody and segregation administrator can go a long way to re-assuring
of assets from the investment manager and other investors and easing some of the increased !duciary
counter-parties on behalf of the fund along with the pressures that are now placed on managers.
independent veri!cation and validation of the assets
within the investment vehicle. With an administrator taking care of these key duties,
it leaves the currency manager with a lot more time to
Moves toward Best dedicate to the !duciary duties it has to the fund and,
most importantly, trading performance.
Practice Of course the key is !nding an administrator that can

do this work up to the new institutional standards
The hedge fund industry has been progressing, or expected and, as importantly, one that has the same
perhaps maturing is a better description, over the past ideology in terms of growing with the

FUND OPERATIONS
registration. Fund administration can now be de!ned

as everything after the trade, and increasingly,
prior to the execution of the trade. Therefore, the
currency manager can turn to their administrator to
take over a whole array of services over and above
the traditional core services associated with fund
administrators such as risk management, reporting,
performance attribution, position monitoring, pre-
trade compliance and investment analytics.
Within my own company, we have seen the writing

on the wall and have embraced the requirements
of the new paradigm, !nding it necessary to
increase signi!cantly our investment into our IT
capability and continuing to make comprehensive
improvements to our proprietary in-house system
by adding new modules for price-check reporting,
revaluations and investment restriction monitoring.
This is something already becoming a trend within
the more progressive fund administrators.
Even within areas such as our web applications

we’ve taken over hosting of our public web presence
to allow further expansion of the functionality on
offer to our external clients with real-time reporting.
currency manager This allows any of our managers to go online in their
and consistently time to see the latest transactions, NAVs, fund prices
innovating with and other pertinent transactional information at the
technology. click of a mouse, with information updated four
times daily, to provide data on a same-day and intra-
In this regard, at Trinity we day basis. And this too is becoming an increasingly
predict that in order to attract demanded solution from investment houses across
the institutional allocation, it the business.
will eventually become standard
Credit exposure issues

practice and a prerequisite for
portfolio managers to release
unambiguous information to investors,
Additionally, many currency managers implement
such as large positions and exposures in
their portfolio or by providing them with their strategies using FX forward contracts or other
documents such as compliance manuals, such over the-counter instruments that often require
valuation policies and risk management only a contractual agreement between client and
procedures. Investment businesses will have counter-party (typically in the form of an ISDA
to evolve continuously in order to maintain their Agreement). This bilateral credit exposure is a point
competitive edge over other less transparent !rms of regular discussion, particularly since the !nancial
and one of the best places to look for this edge is to crisis in which counter-party credit moved to the
evaluate what your administrator can do for you forefront of investor concerns. Moreover, this credit is
as the currency manager. often agreed-upon without cash collateral, allowing
for more ef!cient cash-managed portfolios. However,
New operational
it should be recalled that potential deferred losses
from FX positions can create signi!cant liquidity
paradigm
issues at settlement, when portfolio managers may be
forced to sell underlying assets to the detriment of the
The new operational paradigm portfolio. While regulators may impose incremental
ensures that administration services oversight on the industry to address these concerns,
are no longer centered simply on it’s up to market participants to provide their
back-of!ce functions dealing with clients with process transparency that allows more
accounting, valuation and share continuous management of these issues. In this

Currency Fund Operations – Why not let an administrator take the strain?
regard an industry experienced and technologically more draconian versions, to a more realistic piece
ef!cient third party administrator can assist the of legislation than what was originally proposed.
currency manager immensely in this regard. However, its most recent form will still have a
transformational impact on asset management
Regulatory overhaul
operations in terms of monitoring of risk and
reporting duties for the currency manager. No
As if the complete transformation of one’s historical attribute will be more important than transparency,
business model was not enough of a challenge for a and this means providing clients with insight into the
currency fund manager to come to market and hope importance of the various implementation decisions
to attract signi!cant institutional assets, there has also (contract tenor, rebalancing frequencies, trading
been a complete international sea-change in terms of !lters, proxy currencies and so on). This is where
the rules of the game in the form of global regulatory a good fund administrator can add serious value
overhaul. for an investment manager, providing guidance on
these decisions and also be able to measure their
The nations of the G–20 and the prominent effectiveness through performance reporting tools.
international regulators have been
furiously busy over the past 18 months “Fund
scrambling to implement rule changes administration can
motivated to prevent a repeat of the now be de!ned as
conditions that led to near global !nancial everything after
meltdown and to achieve that over-used the trade, and
phrase “Never again!” increasingly, prior to
the execution of the
As such, despite their communal pledge trade.”
early on in the crisis to !nd a collective
universal approach to improved regulation
for investor protection and reduce
systemic risk, regulatory and
political groups have recently
reverted to national or regional
tendencies to impose disparate
ideological approaches to
achieving this lofty goal.
Over the past few months the

world has seen a slew of major
legislative announcements in
terms of new rules to play the
same game. As a direct result
of these there will be a colossal
impact on all stakeholders within
the asset management industry.
Administrators expect permanent
and signi!cant change as a
result of these major pieces of
legislation being !nalised within
the USA, Europe and further a!eld. Namely such
ground shifting rule changers such as the Dodd-
Frank bill, the Transparency Bill, the FATCA Tax
Reporting, the AIFMD (Alternative Investment Fund
Managers Directive), and global accounting and
!nancial reporting revised guidelines, will raise the
bar immensely.
The AIFMD for one, in recent days looks like it

will be somewhat watered down from previous JOHN MCCANN

FUND OPERATIONS
As with the changes that were necessary to adapt personnel and view the technology in operation. This
to the new operational and reporting requirements, ‘kicking the tyres’ exercise can be the key factor in
administrators equally need to adapt to the new revealing if the administrator can really partner with
regulatory requirements in order to support the the manger in growing the fund and take care of all
increased demand placed upon our clients. This the key duties we have mentioned above in an ever
is a prime example of where over the past few rapidly changing world.
years the traditional role of the administrator has
changed beyond recognition from the days of Another key factor should include whether the
simple accounting and NAV production. Fund administrator has experience in dealing with
administration companies are becoming very much currency funds and whether they have the
involved in providing corporate secretarial and systems that can cope with the different
corporate governance services of a bespoke and scenarios of multi-currency management
industry variety, such as listing obligations and pricing, including handling OTC
and EUSD compliance. It is becoming products.
more critical to provide support to
fund boards and asset managers
in terms of the multitude of Conclusion
international reporting The international asset
obligations with respect management industry
to operational cross has been radically
border compliance. transformed as has
This includes the global !nancial
a wide array environment in the
of local and past 18 months post
international Mr. Madoff. Some of
legislative the change will be good,
requirements that some will be not so good,
may directly or indirectly but there is no doubt that it
impact the product and the will be onerous, costly and all-
business of the asset manager. intrusive in a new world order in
which transparency and liquidity
Selecting an are the buzz words for investors and

regulators alike.
administrator The one sure thing is that change is

Prior to 2008, the fund administrator constant and in order to compete in this
selection process was straightforward and new world order, currency managers will
largely handled by managers, a check-the- need to keep up with it’s wide ranging nature
box type of exercise that revolved around in terms of the demand for best of breed
fund administrators’ brands and fees. The operational infrastructure and compliance
problem with relying too heavily on brand burden, in order to attract assets of an ever
awareness is that a brand’s quality was often increasing institutional nature.
correlated with size. But size and brand do
not ensure that an administrator deploys the One of the best decisions currency
most reliable technology, SAS 70 certi!ed managers can make to assist
processes, domain expertise and scalability, them complete is by selecting a
not only in terms of size but the funds properly quali!ed, internationally
ability to adapt its operation to changing knowledgeable, technologically capable
technology, regulations and market and service-oriented third-party fund
conditions. administrator, to assist them. As an
independent third-party manager, we believe
When choosing an administrator, the manager should that helps in facilitating "exibility when handling the
perform a thorough due diligence process and, where changing needs of a more regulated and demanding
possible, visit the of!ce and meet the staff and key world.

Regulatory Roundup
By Felix Shipkevich, The Shipkevich Law Firm, PLLC
In the wake of the recent !nancial crisis, the United States and the European Union are instituting
major regulatory changes which will impact currency traders and fund managers. In the U.S., the
Commodities Futures Trading Commission (“CFTC”) recently promulgated new rules regarding
over-the-counter retail foreign currency trading (“forex”). Also, in October, the CFTC proposed
another set of rules codifying more transparent registration requirements for certain Commodity
Pool Operators (“CPOs”). On the other side of the Atlantic, the European Union is working on
the Alternative Investment Fund Managers Directive. In November the European Parliament
will vote on this Directive, which proposes changes in the regulation of private equity and hedge
funds. Since currency funds are classi!ed as hedge funds in Germany, this piece of legislation is of
signi!cant interest for currency fund managers operating in Germany.
United States • Rule 4.7: Allows for CPOs to gain exemption

The CFTC’s new rules governing retail forex trading from certain requirements with respect to
went into effect on October 18, 2010. These new rules offerings to quali!ed eligible persons. For a
are signi!cant because they are amongst the !rst to be quali!ed eligible person the minimum security
promulgated pursuant to the Dodd-Frank Act. While deposit for the transaction must be included in
the majority of these rules are aimed at entities that the calculation of the portfolio agreement.
serve as counterparties to retail forex transactions, a • Rule 4.13: In order for a CPO to claim an
number of provisions concern CPOs operating in the exemption from registration under this
forex industry. Such relevant changes include the provision, the aggregate initial margin,
following:

FUND OPERATIONS
premiums, and required minimum security • Ruless 5.15 and 5.16: CPOs, principals, and
deposit for retail forex cannot be larger than 5% those who solicit for them, cannot represent
of the liquidation value of the pool’s portfolio. that the CFTC or federal government has
• Rules 4.24 and 4.34: CPOs must provide sponsored, recommended or approved them
customers a risk disclosure statement which in any way.
states that under the Bankruptcy Code forex
transactions may not be given the same
preferential treatment as commodity customer The new CFTC rules are aimed at preventing fraud
claims. in retail foreign currency trading. Currency fund
• Rule 5.3: People who operate or solicit funds managers should note that the CFTC has recently
or property for a pooled investment vehicle brought a number of enforcement actions against
including forex pools must register as CPOs.
CPOs and fund managers. For example, in July the
Associated persons of such CPOs must also
CFTC brought an action against a registered CPO for
register as associated persons.
making false statements to customers and in required
• Rule 5.9: The minimum leverage for retail
CFTC regulatory !lings. Other recent actions center
forex transactions is 2% of the notional
around ponzi schemes, defrauding customers, and
value for major currencies pairs and 5% the
failing to register as a CPO.
notional value for minor currency pairs. If
the amount deposited does not meet this
requirement, the counterparty must liquidate “Currency fund managers should note
the customer’s position. The CFTC originally
proposed setting the minimum leverage at that the CFTC has recently brought a
10%; however, they decided to lower the number of enforcement actions against
requirement in the !nal rules after receiving
a lot of negative comments suggesting that CPOs and fund managers.”
such a high leverage requirement would force
industry to move offshore. Additionally, on September 8, 2010, the CFTC
• Rule 5.13: Counterparties must furnish to proposed to change the regulatory structure
each customer a monthly statement (this can pertaining to certain CPOs whose units of
be submitted electronically with the CPOs’ participation are listed and traded on a national
consent). securities exchange. The proposed changes would
relieve these CPOs from certain disclosure, reporting

Regulatory Roundup
and record-keeping requirements. Such CPOs would no EU supervision of these sectors. Subsequently, the
still need to provide the same disclosure information, Directive will create a pan-European watchdog with
make the same periodic reports, and keep the same greater oversight powers. Through this watchdog,
books and records they are already maintaining. the directive aims to establish a harmonized
However, they would be relieved from: framework for monitoring and supervising the
risks that alternative investment fund managers
pose to their investors, counterparties, other market
(1) Obtaining a signed acknowledgment of participants, and the stability of the entire !nancial
receipt of the disclosure document if the system. Another one of the law’s main goals is to
disclosure is already available on the CPO’s promote transparency by extending the range of
website information private equity advisers and hedge funds
must distribute. As a result such companies will
(2) Delivering monthly account statements if
have to indicate what !nancial products and markets
the required information is available on the
they are investing in. They will also have a duty to
CPO’s website and
disclose to investors and regulators their investment
(3) Keeping all required books and records at strategy and the amount of leverage they are using
the CPO’s main business address. Such to implement it. Additionally, private equity and
relief is based on substituted compliance hedge funds will be banned from short-selling. These
with corresponding federal securities law. requirements are aimed at safeguarding investors’
Previously the commission had issued such
relief on a case-by-case basis. Additionally,
the changes would require certain
independent directors or trustees of actively
managed commodity pools to register.
The new CFTC forex rules which went into affect on

October 18, 2010 and the proposed CFTC rules related
to CPOs are microcosms of the shift the !nancial
markets are experiencing leading to more stringent
speci!c regulation. In the wake of the !nancial crisis
the government will likely continue to take a hands-
on approach to regulation, an approach that is likely
going to permeate through many !nancial centers
around the world.
Germany
Another important upcoming regulatory
change concerning currency fund managers is
the Directive on Alternative Investment Fund
Managers (AIMFD) which was proposed in
2009. Since 2009, member states of the European
Union (“EU”) have been negotiating the
controversial provisions, and in mid-October,
2010, a common text was adopted. The
main obstacle to adopting this text has been
debates regarding how to treat hedge funds
domiciled outside of the EU. On November 11th the
European Parliament will be voting on the !nal text,
and if it passes, member states will have two years to
incorporate the rules into their national laws.
The Directive is aimed at providing regulation of
private equity and hedge funds, as there is currently

FUND OPERATIONS
money and preventing fraudulent investment

schemes. Other speci!c requirements include that • There is no minimum leverage requirement.
each fund has an independent valuator, a minimum The Ministry of Finance, however, can restrict
capital requirement of 125,000 Euros, and unspeci!ed leverage in short-selling transactions through
leverage requirements to be promulgated in the !nal an executive order intended to prevent abuse
directive. and protect capital market integrity.
• Relative lack of restrictions in Germany for
The main compromise in the common text is the retail investors in hedge funds. There is no
marketing of non-EU funds within the EU. Such minimum requirement to invest in hedge
funds will be given a “passport” enabling it to be funds in Germany.
marketed throughout the EU, rather than having
to gain permission in each individual country. The
requirements for receiving this passport The main way in which the
are the that the country in which EU directive will change
the fund is domiciled must (1) the regulation of hedge
have high enough standards funds in Germany is with
for anti-money laundering regards to transparency
(2) grant reciprocal access and disclosure
to the marketing of requirements.
EU funds in its German law does
territory (3) have not currently
agreements with require fund
EU member managers to
states where disclose leverage
marketing covers and investment
the exchange strategies to clients, and
of information prefers to leave it up the
relating to taxation and investors to make individual
monitoring, and (4) recognize and arrangement with fund
enforces judgments in the EU on AIMFD issues. managers. Additionally, the EU
“passport” regime will allow investors to bypass the
The AIFMD has raised concern among currency current private placement regime in Germany. Instead,
fund managers operating in Germany, because such investors can gain access to the entire EU market,
funds are categorized as hedge funds under German rather than complying with each individual countries
law. They are concerned with how the AIMFD will requirements. Although the German regulators
change the regulation of hedge funds in Germany. favor a higher standard for the passport regime, this
Currently, major requirements for hedge funds in will be a favorable development for currency fund
Germany include the following: managers outside the EU looking to enter the German
market. Also, additional costs will be incurred as
fund managers will need to comply with the German
• Hedge funds must obtain a written license regulators and the pan-European watchdog.
from the national regulator.
• Hedge funds can only market and distribute While many have speculated that the !nancial crisis
through a private placement. Therefore, they is ending, an inevitable result is more stringent
must follow the rules applicable to prospectuses, government intervention in the !nancial markets.
which includes containing a list of the fund The failure of the global !nancial system was likely
rules and a warning about the total possible perceived by the government as a failure on self-
loss. This rule applies to foreign funds as well. regulation. In the U.S. the Dodd-Frank Act will
• Hedge funds are subject to minimum capital greatly impact the !nancial sector and continue the
requirements, but advisers are not. Such trend to increased government regulation which will
capital requirements are expected to provide likely trickle to European !nancial sectors.
a safety-net against existing obligations when
asset values decline sharply. Felix Shipkevich can be reached at
fs@shipkevichlaw.com or on +1 212-252-3003

Thanos Papasavvas:
“We are guardians of a
30 year track record”
Currency Investor speaks with Thanos Papasavvas,
Head of Currency Management at Investec Asset Management.
Thanos, how long have you been working in to active currency management. The UK has
been ahead of the curve so far, but certain parts
the currency management business and what of Europe and the US are catching up. Why
do you particularly like about the industry? invest in currencies? Most importantly because
currency investing can be pro!table. This is
I have been involved in currency markets for 18 partly due to the inef!ciency of the asset class
years. In fact, about a week after starting my !rst as a large number of market participants do
job as an economist for the UK government the not try to maximise their returns when trading
ERM crisis took place in September 1992 which currencies, but also because currencies may
sent the pound 15% lower in two weeks and 25% trade away from their fair value for prolonged
lower by the end of that year. That experience periods of time.
gave me an early indication of the type of
movements expected in this asset class but also If we take a step back to the !xed exchange
the opportunities which they can generate. rates world of the 1950s and 1960s, currency
investing was neither necessary nor worthwhile.
CI I NT ERV IEW
Why currency management? It is the one asset This changed over the last 15 to 20 years and
class which is impacted directly by everything has developed greatly by way of cross-border
taking place around the world, 24 hours a day, portfolio exposure management and as a stand-
whether it is economic developments overnight alone way of managing assets.
from New Zealand, political turmoil in the
In addition, currency investing has historically
Middle East, threats of ‘currency wars’ at the
provided welcome portfolio diversi!cation with
G20 level or interventions by central banks. It
returns providing a low correlation to equities
gives us the opportunity to add value to our
and bonds. Furthermore, currency markets
investors’ portfolios by taking advantage of are exceptionally liquid; in fact, the foreign
economic and political developments around the exchange market was the only market which
world alongside a thorough understanding of stayed open for business throughout the recent
market positioning and expectations. !nancial crisis. Its transparency and liquidity
were so prevalent that equity and credit
What do you see as the main value managers would use currencies as a proxy for
proposition of making an allocation to active hedging some of their more illiquid positions.
currency management to a portfolio and why
does the case for doing this remain so strong? Investec Asset Management believes that
applying a multi-strategy approach to
In the UK we are seeing pension funds invest an currency management creates superior risk-
average of 5% of their asset allocation strategy adjusted returns. Why is that?

CI INTERVIEW
Studies highlight many different ways

to generate returns across both major
and emerging market currencies such as
valuations, trends, interest rate differentials,
fundamental analysis etc. Some currency
strategies can be easily quanti!ed but others
are better applied on a qualitative basis.
We believe that applying a multi-strategy
approach to currency management creates
superior risk-adjusted returns.
How is the Investec currency

management team organised and what
are your main day-to-day responsibilities
within the !rm?
The team is broken down to the three key
components of our process: quantitative,
qualitative and emerging markets. We
believe in a multi-strategy approach and the
team represent their key specialisations with
separate risk/return targets, drawdown
limits and risk management. I maintain the
overall responsibility for the program and
ensure that our process operates ef!ciently
and optimally.
In what ways has Investec tried to

differentiate itself from other leading
currency management !rms?
We differentiate ourselves in both process
and products.
From a process point of view we believe

that there are three key differentiating
features between currency managers:
the quantitative / qualitative split, the
behavioural / fundamental split and
the breadth of the currency universe.
We believe in a blended quantitative /
qualitative approach which ensures that
quantitative models capture the strategic
drivers of currencies and do the ‘heavy
lifting’, whilst qualitative analysis and
judgement from managers with long
experience over a number of economic
cycles complements the process. We also
believe in analysing both fundamental
and behavioural drivers as the former
tend to drive currencies in periods of
uncertainty whilst the latter impact market
positioning, momentum and technicals.
Finally, we have a very long heritage and
deep understanding of emerging market
currencies which helps us invest in a very
THANOS PAPASAVVAS broad universe of over 50 currencies.

Thanos Papasavvas: “We are guardians of a 30 year track record”
multi-currency benchmark in addition to the more

familiar single-currency based strategies. Since then,
we have expanded our capabilities, tailoring these to
!t the varying needs of clients looking for currency
management solutions. Maintaining continuity in
our investment process and team, our strategies
incorporate all three of our quantitative, qualitative
and emerging market drivers and include our
specialist emerging markets currency expertise.
Most recently, having been pioneers of a multi-

currency benchmark, we this month have broadened
this benchmark to include core exposure to 24 of the
most liquid emerging market currencies. Although
we have long included an active allocation to these
markets in our process, we now feel it is time to
formally include them in our underlying benchmark
given the opportunities available for investors
looking to take advantage of improved fundamentals
in the broader EM currency universe.
What methodology do you use to oversee the

currency management process and allocation of
the risk budget?
We have a process committee which meets quarterly

and oversees the currency management process. The
committee reviews the performance, risk utilisation
and process dynamics of the three sub-processes
as well as their risk management disciplines. Our
long term aim for the risk allocation across the three
diversi!ed drivers of performance is to be equally
divided.
As well as ensuring diversi!cation and low

correlation across our process, it is equally important
for us to maintain a low correlation with other asset
More importantly we do not invest in a naive pro- classes and market ‘betas’ in the industry. Our
beta approach to emerging market currencies, but analysis monitors a number of market correlations
instead in a relative value approach taking an active be it the S&P 500, Deutsche Bank’s DBCR Index or JP
view on emerging market beta. Morgan’s ELMI index. We think that it is important
for investors to distinguish between genuine “alpha”
based currency capabilities rather than a ‘beta’
Our offering of currency management solutions
process charging ‘alpha’ fees.
is diverse, ranging from conservative un-geared
to highly geared absolute return solutions, multi-
currency benchmarked solutions and emerging
Having identi!ed market inef!ciencies and
market only solutions. investment opportunities to generate currency
signals how do you go about constructing a
Your heritage in currency management has portfolio?
developed over the last thirty years – could
Our currency portfolios are constructed using our
you tell us about the evolution of the currency currency management process. Our managed
management investment capability? currency and currency alpha solutions are
constructed by combining all three of our diversi!ed
We do have one of the longest standing active currency drivers: quantitative, qualitative and emerging
capabilities in the industry, which dates back thirty market analysis. Our emerging markets solution is
years and was the !rst to introduce the concept of a constructed using only our emerging markets driver.

CI INTERVIEW
Our process blends quantitative and qualitative Our risk monitoring tools calculate daily predicted
inputs which in turn are supported by state of the art tracking error, market beta and value at risk (VAR) for
external and internal systems for risk management the selected strategies. The VAR !gures are reviewed
and implementation. The currency team meets by an independent risk team, and compared to pre-set
weekly to discuss strategy and convenes daily at 4pm limits to serve as review and risk reduction triggers.
to review all positions and risk following the London
closing prices. Moreover, the market risk team generates a weekly
risk-budgeting report reviewing the predicted risk
In terms of converting positions to portfolios, we utilization level per sub-process. Positions are also
de!ne investment risk as projected volatility relative monitored daily by the portfolio management team,
to our clients’ benchmarks. A portfolio should exhibit with stop-loss levels in the market.
suf!cient tracking error to achieve its performance
targets, but without exposing the portfolio to We also analyse tax, legal and administrative issues
unnecessary volatility. For each client we tailor a in great detail. In cooperation with our legal and
risk budget based on their performance objective, administration departments, we aim to determine
risk appetite and mandate restrictions that looks the best way to access the local markets (e.g. forward
to take full advantage of the permitted investment market/NDF, treasury bills, commercial paper,
opportunity set and diversi!cation potential. through credit-linked notes).
What external and internal risk management In addition to all the risk analysis we believe that
systems does your team employ? pragmatism and good portfolio management are
essential to successful investing, especially in
Risk management is an integral part of our process. emerging markets. We will always have long and
In our view risk management is not only about short positions in a core portfolio and will aim to
limiting drawdowns when performance is negative, keep the portfolio well diversi!ed at all times.
but preventing signi!cant losses by applying a
well diversi!ed process. Our preference for a
multi-strategy approach with diversi!ed drivers of
performance, not reliant on one particular style such
as carry, should ensure that our portfolios are well
balanced. This in itself, however, is necessary but not
suf!cient in limiting drawdowns.
We therefore apply
risk management
to each underlying
process as well as to
the overall program
in order to ensure
capital preservation
amidst more
uncertain or
turbulent times.
We have speci!c
drawdown triggers
which reduce risk
as the pro!t and
loss of each strategy starts to deteriorate
below a prede!ned level.
We have an independent market risk

team that works closely with portfolio
managers in a pro-active fashion
to monitor levels of risk, including
provision of the daily and weekly
risk reports. Working in close physical
proximity at our London of!ce helps to
facilitate regular discussion.

Thanos Papasavvas: “We are guardians of a 30 year track record”
Preliminary results from the BIS triennial report

indicate that daily traded FX volume increased
from USD 3.3 trillion in 2007 to USD 4 trillion
in April 2010 with a signi!cant increase of client
"ow in Asia and more demands for emerging
market currencies. Were you surprised at this data
and in what ways do think it might help to further
expand the currency investment opportunity set?
The survey shows that not only have foreign exchange

volumes continued to increase, but the mix of
currencies traded is becoming more diversi!ed. For
example, the percentage share of the US dollar has
continued its gradual fall !rst apparent in the April
2001 survey, while the euro and the Japanese yen have
gained relative share. Australian and Canadian dollars
both increased market share, while the British pound
lost ground and the Swiss franc declined marginally.
The market share of 23 emerging market currencies
increased, with the biggest gains for the Turkish lira
and the Korean won, followed by the Brazilian real
and Singapore dollar. In general, the survey also
re"ected an increasingly global marketplace, with
cross-border transactions increasing as a proportion of
total transactions for the !fth consecutive survey.
Do you have any pointers for new investors

looking to choose a manager and get exposure to Do you think we are entering a period when
currency funds? currency manager returns will start to increase and
become more stable?
First we would suggest that investors with no
specialist understanding of currency management, or Currency managers with a diverse process have in
no internal research team, partner with an independent general delivered positive and uncorrelated returns
investment consultant for the selection process. Key throughout the recent market turmoil of the past
selection criteria might include some of the following: three years. The exception has been carry strategies
which were adversely impacted by the rising
volatility and changing market environment of 2008.
• Ensure diversi!cation within a currency For this reason we have always been of the view that
allocation, either through the appointment investors should select managers with diversi!ed
of multi-strategy managers or a selection of processes within their program or mix together
different styles of currency managers. different styles of currency managers in order to
• Ensure that managers have a clear succinct diversify their allocation.
philosophy and transparent, repeatable process.
• Ensure that managers have had a long
continuous live track record.
Over the next few years what factors and issues do
• Ensure that there is a dedicated currency team you think will most in"uence currency manager
with low turnover of staff and long experience performance and may present challenges for the
spanning a number of economic cycles. industry as a whole?
• Ensure that risk management is an integral
part of the philosophy and process, not a We believe that volatility will remain elevated and
reactive afterthought following a period of hence systematic single strategy processes will
underperformance. most likely underperform. Volatility should remain
• Last but not least ensure that the company is high partly due to the economic uncertainty of
committed to currency management as an asset the current monetary/!scal policy mix applied by
class and invests both time and resources to policy-makers around the world, but also due to
maintain the team’s competitive advantage. the geopolitical friction between countries’ currency
tolerances. We believe that governments will be

CI INTERVIEW
unable to reach a multilateral consensus and will why I joined Investec Asset Management in the
revert to unilateral approaches creating friction and !rst place four years ago. First, the quality of the
opportunities not too dissimilar to the recent rhetoric individuals and the passion of the team; second, the
in the news on ‘currency wars’. In this type of market long heritage in currency management combined
environment we believe that quantitative tools, with a clear process and philosophy; !nally, the clear
which do the ‘heavy lifting’ within a process, should direction and support of the organisation. Given
be complemented with qualitative judgement and the strength of our team, our clear philosophy and
analysis from managers with long experience who process, and a supporting organisation, I believe we
have navigated similar market conditions in the past. have all we need for the future.
What are your latest views on currency markets? The views expressed are those of Thanos Papasavvas and do not
necessarily represent the views of Investec Asset Management. The
We are seeing a new phenomenon emerging: the information contained in this interview should not be construed as
investment advice nor as an invitation to make an investment. Whilst
willingness of markets to reward pro-active !scal
all reasonable care has been taken to ensure that the information
tightening with lower risk premiums and stronger contained in this interview is accurate, no representation or warranty
currencies. This was most evident in the UK where the is made in relation to its accuracy or completeness.
coalition government’s June ‘austerity’ budget and the
more recent Comprehensive Spending Review have
been welcomed by the market and rating agencies,
despite cuts in near-term growth forecasts. As far as
the US dollar is concerned, we believe it will continue
to weaken for a number of reasons. Unlike the euro
zone and the UK, we believe the US (and Japan)
are behind the curve of !scal adjustments. Not only
has the US not started to address their large and
expanding !scal imbalances, but there are signs of a
possible rift between policy makers. The prospect of
gridlock in Congress will only make it more dif!cult
for the Administration to push forward a coherent
!scal agenda and eventually, a buyers’ strike by the
so-called ‘bond vigilantes’ could leave the US dollar
vulnerable in the medium term.
As far as the recent ‘Currency wars’ headlines is

concerned, it has been a great catch-phrase for the
media, but there is nothing new from what has
been happening already in currency markets. The
Brazilian, Israeli and Korean authorities, amongst
others, have been intervening for quite some time
to stop their currency from appreciating, with the
only new participant being the Bank of Japan which
stepped in to the markets in September. We believe
that policy rift at the G20 level will remain with a
multilateral consensus unlikely. The most likely
outcome in our view is a ‘benign neglect’ on the US
dollar not too dissimilar from the period after the
previous US recession in 2001.
Investec Asset Management has achieved a

remarkable track record over the last 30 years in
managing both developed and emerging currencies.
Looking to the future, what steps will you and your
team be taking to maintain that achievement and
protect your competitive advantages?
The three key factors which will help us maintain our
competitive advantage are the same three reasons

From strategies to style buckets:
searching for weakness in the
investment process
By Gerry O’Kane
Whatever varying opinion you might get from investment managers, the one thing they
will agree upon is that investment strategies have weaknesses. What they won’t agree on is
which style has what weakness because that might undermine their own business, but you
can be sure everyone can highlight "aws. What has become more apparent is that investors
in the currency sector, or those seeking to dip a toe into it, are desperate to understand
the strategies available in the marketplace and their relative strengths and weaknesses. In
spite of the carry trade hiccup of a couple of years ago, applying currency strategies to both
portfolio risk mitigation and gaining a diversi!ed positive return has taken on a new lustre.

INVESTOR PERSPECTIVES
– it can be an attractive, independent source of

investment alpha, which often has a low correlation
with other investment returns, or it can be used to
manage the currency exposure that results from
investing globally in other asset classes,” says Mike
Harris, Director of Trading at Campbell & Company.
Identifying the aims

It is also important for clients to identify what their
aims ought to be. “They should split their desires,”
advises Lindahl, “They need to look at their currency
risk because a declining currency over three years
can have a considerable impact on a portfolio. Your
objective ought to be to hedge against currency
declines and remove the risk with a repeated shorter
term investment cycle.” “However,” he
warns, “You have to be aware that this sort
of cyclical currency overlay is unlikely
to provide added value when the
currencies go up.”
But as with ever-lasting debate of what

exactly constitutes beta and alpha, the
description and labelling of strategies can vary
between managers although more often on the
minutiae rather than the generalities.
You have investors seeking to pursue an active

approach in either hedging the currency risk in their
property, commodity, !xed income or equity holdings.
They might have the same objectives using a passive
approach.
Then you have those seeking alpha, doing better
S
than simply re"ecting market movements, whether
ince the changes brought about by the Credit seeking absolute returns or not. Primarily the approach
Crunch, with respect to both the structure of requires active management.
portfolios (especially in the US) and expected
returns, institutions are having to pay greater
attention to currencies. “There may be remaining Strategy formats
doubts about currencies as an asset class in some According to Matt Roberts, senior investment
quarters,” says Ulf J. Lindahl, Chief Investment consultant specialising in currencies with Towers
Of!cer at A. G. Bisset & Co., “but their relative Watson, whatever the format of overlay or hedge
performance has done well. Pensions typically have fund the strategies generally fall into four formats,
about 40 per cent of their portfolios in overseas assets and the one that encompasses all of them.
and about half of that US dollar-denominated. Even
a two per cent swing in the value of the dollar with “You’ve got managers focused on the carry trade,
equity return expectations standing at up to eight managers interested in value type signals and those
per cent means that you can lose 25 per cent of your interested in the momentum signals and !nally those
expected portfolio returns.” interested in volatility trading,” lists Roberts. Then
there are those using quantitative, discretionary,
“Investment objectives are an important determinant fundamental, technical discretionary and so the
of how an investor participates in currency trading combination of lists continues.

From strategies to style buckets: searching for weakness in the investment process
felt positively inclined towards and number of

strategies that are available within the active currency
arena [in hedging]. One of the reasons are the high
fees charged by many of these managers.”
He argues hedge fund type fees of two per cent of

asset value and 20 per cent on out-performance are
high when many of the styles offer little more that a
crude combination of the basic carry, value, volatility
or momentum styles. As he and other managers point
out this comes back to the argument of alpha and
beta and de!nitions.
The argument goes that if you are replicating a pure

carry strategy - long high-yielding currencies through
funding by the low-yielding currencies, should this
not be de!ned as beta? And if it is, why
“Investment are you paying a premium for it?
objectives are
an important Of course even that discussion is not
determinant of straight-forward as Dori Levanoni, a
how an investor partner at First Quadrant and the global
participates in macro strategies manager explains: “Let’s
currency trading ...” look at carry trade, it’s a well-de!ned
theory, but if you take 10 managers saying
MIKE HARRIS,
CAMPBELL & C OMPANY
“Typically managers promote themselves with a list

of characteristics, like systematic or discretionary,
however often these characteristics do not help a lot
at all. And more commonly it’ll be a more speci!c
strategy declaration like carry, fundamental, break-
out or momentum, mean-reverting and volatility,”
says Thomas Suter, CEO of Swiss-based Quaesta
Capital. “Some de!nitions help us a bit more, but
they still aren’t giving highly transparent information
for the investor such that he would know
in which environment he would earn or
“You’ve got
lose money, for example,” he adds.
managers focused
on the carry trade,
Indeed, identifying the weaknesses of managers interested
these strategies or styles goes beyond in value type signals
their individual characteristics but also and those interested
encompasses how risk factors should in the momentum
be considered and how contemporary signals and !nally
currency products might make certain those interested in
styles redundant. volatility trading,”
Roberts, for example, points out that

many UK institutional clients had opted only for the
passive currency hedging route, typically as a risk
management method. According to him: “We haven’t MATTHEW ROBERTS

they do carry, the correlation of their performance

would be less than 100 per cent and in some cases
less than 25 per cent and that’s the problem with
beta; a divergence of opinion leads to a divergence in Questions you
should ask your
performance.”
On top of that, according to others, some of the

more basic styles might easily be replicated through
cheaper products such as exchange traded notes. currency manager
Mix and match General questions:
The reality is that very few institutions or boutique
investment houses would boast that they based • What kind of experience should we
their process on a single strategy, most talk of a anticipate as currency investors?
mix-and-match activity, what’s best for the market
• What are realistic risk/return expectations?
environment. And there’s little doubt that the set of
style buckets, using these multiple strategies is what’s • What are realistic time horizons within
expected. “Like most other markets, currencies are which we should expect to realise our goals?
impacted by both broad macro-economic factors • What can go wrong, and how will we
and by narrower market-speci!c factors,” says Mike recognise it?
Harris. “Consequently no single investment style
• How real the presented track record?
can be successful in all market conditions. For this
• What are the the draw-down/behavioural
risks of a style?
• Classic due diligence questions – operational
set-up, back up on portfolio management
team, risk management, operational frame
work, external partners, prime broker,
execution banks… etc.
• If I’m told the strategy is ‘unique’, what
makes it so or am I paying over-the-odds for
an enhanced commoditised service?
Questions on styles:
• Momentum: what time horizons do your
strategies use?
• Value: what do you do when the “animal
“Typically spirits” are out and the markets ignore the
managers promote fundamentals?
themselves with a
list of characteristics, • Carry: does your strategy trade “long only”
like systematic carry, or can it also trade “short” carry? If
or discretionary, so, what sort of information does it use to
however often oscillate between long and short?
these those
• Volatility: do you use volatility as a
characteristics do not
stand-alone trading strategy, or as a
help a lot at all.”
risk-management overlay on positions
accumulated by other styles?
THOMAS SUTER

reason it is important to invest either with a manager that goes into the manager’s ‘bucket’. “Managers are
that trades multiple styles, or with several different often guilty of using these phrases but are poor at
managers who employ different investment styles.” explaining them and are imprecise in how the process
works,” says Levanoni.
From Lindahl’s point of view, while managers
might move between styles, trend following or While the carry trade became the doyen of the
the momentum strategy is probably one of the currency sales pitch in the mid-2000s, its fall from
most common investment styles, certainly among grace caused a stutter in the use of currencies
currency trading advisers. While it might be called either as an asset class or in risk mitigation. “The
trend investment there are elements of fundamental carry strategy did very well until summer 2007,
research. “It’s important that when the managers see but afterwards for about two years the exact same
a change in the economic winds, you can suitably strategy just lost money. Does this now mean that the
trim your sails. The trends will continue to unfold but strategy is bad and not working? No, it doesn’t really,
might be based of different fundamental conditions: it just means that it’s the wrong strategy for a certain
in the 80s, for example, issues of money supply and environment,” argues Suter.
in"ation were key factors,” outlines Lindahl.
“Unfortunately, like most of these things, what
But whatever the managers call their styles or how tends to happen is that people down-weight certain
they mix-and-match them, clients must understand strategies when they’ve done poorly, like the carry,
the underlying weaknesses of each methodology rather than before they have done poorly and without
a lot of foresight,” observes Adam Olive, a co-
manager of HSBC’s GIF Global Currency Fund. “One
of the carry trades biggest risk is you can have very
sudden and abrupt draw-downs.”
“If a manager is just making the decision

to go long that high yielding currency and
“what tends to short the funding currency based on the
happen is that people yield differentials, then if everybody is
down-weight certain doing that, the higher the long currency
strategies when
goes and it gets very expensive based on
they’ve done poorly,
like the carry, rather
fair value. When the correction comes
than before they you are obviously positioned the wrong
have done poorly way when everybody tries to unwind the
and without a lot of trade,” he warns.
foresight,”
Then the market realise the fundamental
value of the currency, perhaps based on
purchasing power parity (PPP), has skewed the
currency away from fair value.
And when it has downturns, it has serious

downturns. The RBS FXY index (carry) shows that in
the !rst three months of 1980 the strategy returned
4.56%, 8.04% and 16.38% but in April you would have
lost a whopping 20.75%. Similarly in 2008 August,
September, October and November, the carry strategy
would have lost you 10.62%, 10.26%, 15.88% and
3.99% respectively.
But it’s not just holding a carry trade at the wrong

time and incurring losses. It has other implications to
ADAM OLIVE a portfolio.

although not always. That would be one reason why

it could not be a seen as a diversi!ed return source.”
Often the position is leveraged and in 2007
institutions had to !nd the cash to pay off their
positions, often having to sell equities which had
also plummeted. It acted as a ‘double-whammy’,
since institutions would also lose whatever upside
the equities might have made in the coming market
recovery. “So what you have, especially with the
passive hedge done in this way is not the
just the immediate costs but losses on
“There may be
future gains translating into cash-"ow
remaining doubts
risk,” summarises Lindahl.
about currencies as
an asset class in some
quarters, but their Momentum trading has similar
relative performance disadvantages.”If you have just been
has done well.” buying Aussie dollar because it is going up,
it shows no awareness of where fair value
is and as it becomes expensive relative to
fair value and when there’s a correction it will take
a while before the momentum signal changes sign
ULF J. LINDAHL
“In reality the carry trade acts like

you’re buying risky assets and selling
safe assets increasing your exposure
to risk, so when risk rises it can
hit your portfolio. So many of these
currency strategies act similarly to other
asset classes which are much simpler or
cheaper to buy,” observes Levanoni. He also
argues that if you do examine the returns of
carry indices to the MSCI World Index or FTSE
there is a fairly strong correlation between the two
numbers. “It varies over time but it is not zero,” he
says.
It’s a viewpoint with which Matt Roberts at Towers

Watson agrees. “If you take an historical analysis and
look back at the carry trade, it has left tail properties
and the distribution of returns of the carry trade has a
skewed pro!le. So you get large negative events, but
you don’t get to very large positive events... When
equities have a very bad time, so can the carry trade,

and you get out of the trade,” warns Olive. Abrupt would be chaos in the Euro region if Greece did
changes in the perceived risk premia can have a default, since it only represents about two and a
similar effect. half per cent of the Euro’s GDP, it’s the perception,”
explains Olive.
Impact of Greek crisis On top of this is another weakness the client has to
The Greek crisis had implications on both the resolve. “With something like momentum you can
momentum and carry trading, and, to an extent highlight that your analysis is purely price-based
volatility. As the perception of risk on the Euro with an intuition to move in and out of trends,
increased as more and more bad news "ooded out but that can mean that the investor does not truly
of Athens and you were playing it against the Swiss understand why a product has made or lost money,”
franc, for example, you got large exchange rate says Roberts.
moves.
Volatility trading has taken on a higher pro!le in
“And that’s what happened in those currencies, recent months, bene!ting from a perceived unstable
triggered by the Greek problem. It was the perception global economy, with uncertain corporate earnings,
of risk in the Euro currency - it isn’t so much there GDP growth and high jobless rates. According to
Suter, good volatility strategies can have many
bene!ts. “Long/short volatility strategies may be
capable of performing in every market environment,
however, their weakness is the missing transparency
and knowing whether the underlying strategy should
have performed well or badly in the last few weeks,
there’s a dif!culty in predicting performance !gures
of those programs,” Thomas Suter points out. “Some
investors may look at it and just say, I just want to
have this investment over the long run that provides
me with good uncorrelated positive returns.”
But there is another issue with volatility strategies.

Because of their nature they must use derivative
products traded over-the-counter (OTC), like options
rather than forwards or futures.
Increased risk
These OTC products create increased operational and
settlement risk. “Something like an option can have
very large changes in price because of the leverage
and people shouldn’t trade instruments if they are
not capable of measuring the risk in them and
managing it. So obviously somebody who’s
doing volatility trading will need a much
better risk management system than
somebody who was just trading
spot or forwards,” agrees
Olive.
On top of that is
counter-party risk
and making sure
your prime broker
or under-lying
counter-party

you tend to see that when you get these draw-downs

is that the product comes under pressure - you don’t
get rational behaviour.”
And this behavioural factor extends to the value

strategy, often based on more fundamental economic
analysis. “Valuation factors like PPP can take a
long time to come right, the same with any value
strategy. It doesn’t mean it doesn’t work over time,
but it can take a long time to come right over time,
and consequently is open to behavioural issues, and
clients might not stay the course to ultimately realise
the bene!ts of that strategy,” explains Roberts.
This style also has other drawbacks.

“You have to ask, will
“Value may not work when a powerful
the style avoid the external force, like Central Bank
elevator down?” intervention, is propelling markets,”
observes Mike Harris.
Conclusion
The reality is that all single strategies are open
to criticism and houses have increasingly moved
to multiple styles, moving from one to the other
depending on the environment.
Over at Campbell & Company the trading bucket

includes momentum (trend), value, carry, volatility
and mean reversion. “We use quantitative models
DORI LEVANONI
to trade all of these styles,” explains Mike Harris,
Director of Trading at Campbell. One style Campbell
does not trade is arbitrage . “For us, arbitraging small
doesn’t go the way of Lehman Brothers. This is usually price differences between different ECNs or market
done through master netting agreements under the makers would negatively impact the pool of liquidity
auspices of ISDA, multiple prime brokers and holding we depend on to trade all the other styles.”
collateral and cash in separate accounts, often with
a custodian. “Nearly everybody has ISDA netting However the quantitative approach whether based on
agreements and anybody who isn’t, is incompetent,” multiple styles or high frequency trading has its own
warns Olive. drawbacks. They are only as good as the underlying
model and understanding that is as much an issue in
They are often also leveraged. “This can create capital understanding the investment process, as it is with
ef!ciency, less assets put in to generate the same institutions swilling around in their style buckets.
overall return, but the problems that we have found
in the high more highly leveraged products are more One way to assess styles, according to Dori Levanoni,
about behaviour in nature,” says Roberts “First of all, is to use consultants but he warns few of the smaller
if you invest in a high volatility product then it really ones might have the necessary skill-set to understand
requires you to react in a rational way, i.e. a logical all the methodologies in the market. “You have to
way. If a highly leveraged product experiences draw ask, will the style avoid the elevator down? Look at
down, but you believe that it has good fundamental whether it has a high frequency of positive returns
qualities, you should probably increase your coupled with a small frequency of large negative
allocation. But at such high levels of volatility, what losses. Does it have a positive mean?”

VIE WP OI N T
‘Currency wars’ and

emerging in"ation risks

Philip Poole, global head of macro and investment strategy at HSBC Global Asset
Management, looks at the implications for investors as appreciation pressures
continue to build up with many Emerging Market currencies.
The world is in the middle of what Brazilian

!nance minister Guido Mantega has called an Don’t forget asset
‘international currency war.’ And on this view of
the world investors might rightly feel that they are price in"ation
in the trenches! The US Fed seems poised to commit For investors, it’s not just about getting exposure
to injecting up to USD 1 trillion in additional QE, to higher yielding currencies. Stronger emerging
ensuring !nancial markets remain saturated with markets fundamentals have also drawn investment
liquidity. For their part, central banks in China, Brazil, into debt and real estate markets. And the attraction
Taiwan, South Korea and elsewhere are intervening of higher levels of economic growth and expectations
to curb appreciation of their currencies as the wall of of corporate earnings growth have additionally
cash "oods into emerging markets. created in"ows into equities, although the equity
"ows have been selective.
Loose monetary policy Brazil received close to USD13bn in net foreign equity
Without doubt, the starting point is very loose in"ows in the year to end August and India has also
monetary policy in the developed world. It re"ects been a big recipient whereas Russia, by contrast, has
the weakness of the recovery in industrialised not seen "ows of this magnitude. In China’s case it is
countries where !nancial sectors are damaged and the real estate market not equities that has been the
where there is a massive overhang of indebtedness favoured asset class.
in the government and household sectors. Policy
rates and market rates are very low and growth in In certain markets, valuations have already become
the developed world is anaemic. It means that when stretched and there is a risk that bubbles build. This
investors search either for yield or for growth they are is one of the reasons why monetary policy needs to
drawn to emerging markets where the fundamental be tightened in a number of emerging economies.
outlook is stronger and where in"ation rather than And over the longer term, there also needs to be
de"ation concerns are driving up interest rates, development and reform of domestic !nancial and
generating an attractive interest differential. asset markets to improve the ability to absorb these
in"ows productively.
Brazil epitomises this story. The economy is growing
at a very healthy pace, debt ratios have been falling
not rising, interest rates give a very decent pick up
for G3-based investors (the Selic policy rate is 10.75%,
Will in"ation mean we
more than 10 percentage points above Fed funds) and
earnings growth has been very supportive of equities.
still end up with real
But the in"ows into Brazil and other emerging
markets have created a problem - unwelcome upward
appreciation?
In common with other emerging markets, recently
pressure on currencies.
China, the central bank in Brazil has been raising
Governments and central banks in the emerging rates to combat in"ation pressures. There are three
world have responded with currency intervention. key sources of in"ationary pressures in many
But there is no free lunch. The intervention itself emerging markets. Firstly, food price in"ation has
only shifts the pressure it does not remove it. If the been a problem in a number of markets, for example
intervention is fully ‘sterilised’ through open market in India. This re"ects local and global supply
operations it will create a loss for the public sector disruptions. It is particularly problematic because
via a ‘negative carry’ on the resulting position. If it food is a dominant component of CPI baskets in
is not sterilised, the likelihood is that it will generate many emerging markets - in some cases it is more
in"ationary pressures. than 60% of the basket.

‘Currency wars’ and emerging in"ation risks
As already mentioned, unsterilised currency from the developed countries met by currency
intervention is a second contributory factor. And intervention in the emerging world. In such an event,
thirdly, it should not be forgotten that markets like despite currency intervention to prevent nominal
India and China did not see a decline in output appreciation, the risk is that there is real appreciation
during the global recession. In fact, in these two cases, through the backdoor – via an adverse in"ation
there was only a slight moderation in growth. differential with most of the developed world – such
that currency intervention would ultimately prove to
With growth having re-accelerated, it has created be self-defeating.
concerns about tightening capacity utilisation and
labour markets in a number of emerging economies For now it looks like liquidity will continue to "ow
and this runs the risk of turning a supply side from developed to emerging economies. While this
in"ation shock into an on-going in"ation process. suggests on-going upside momentum for emerging
markets asset prices it also creates the risk of asset
Buy some in"ation price bubbles and in"ation.
protection in emerging So as well as remaining exposed to carry currencies,

investors in emerging markets should consider
markets getting some in"ation protection via in"ation-linked
securities.
For this reason, in my view, monetary policy needs
to be tightened in many emerging markets. The
problem, of course, is that by raising rates when the
Fed and other developed world central banks are on
hold only increases the interest differential and the
carry on these emerging currencies.
One way to square this circle is to increase reserve

requirements for banks to prevent base money
growth translating into broad money growth and
China and Turkey, for example, did this recently.
Another is to try to restrict portfolio in"ows and

I believe we are likely to see more
controls introduced on inward capital
"ows. Brazil recently shored up its “as well as remaining
defences, pushing up the so-called exposed to carry
‘IOF’ tax on such in"ows from 4 to currencies, investors
6 percent, the second increase in a in emerging markets
month. should consider
getting some
in"ation protection
Policy makers in other emerging
via in"ation-linked
countries could well follow suit. But securities.”
with so much cash sloshing around
the global !nancial system in search of
yield and return, to have a chance of
being successful controls on inward capital "ows
need to be highly punitive and even then may
not work. Indeed, upward pressure on high
yielding currencies is likely to intensify.
But there is no escaping the fact that

in"ation could also be the end result for
emerging markets of the combination
of a frantic search for yield coming PHILIP POOLE

SUBSCRIPTION FOR
Subscriptions Dept. Tel: +44 1208 821 801
Fax: + 44 1208 821 803
CURRENCY INVESTOR is published 4 times a year. Subscribers receive the printed magazine
and a password to gain unrestricted access to the Currency Investor website (www.currency-investor.net)
Your details will not be divulged to any other organisation.
YOUR DETAILS
Name Job title:
Company:
Address:
City: Post/Zip Code:
Country:
Telephone: Fax:
e-mail:
PRICE (tick the relevant box and circle the currency you wish to be billed in)
1 Year (4 editions) at 125 GBP 145 EUROS 200 USD
QUANTITY REQUIRED Receive one free copy for every 10 subscriptions.

Please Fax a separate list of names & addresses.
TOTAL PAYMENT
PAYMENT OPTIONS (please tick where relevant and follow the instructions)
CREDIT CARD
Mastercard Visa American Express Diners Club Other (details)
Card Number
Expiry Date /
CHEQUE make payable to ASP Media Ltd, to Subscriptions Dept, ASP Media Ltd.,
Suite 10, 3 Edgar Buildings, George Street, Bath, BA1 2FJ, UK
BANK TRANSFER
Account: ASP Media Ltd Sort Code: 30-90-54 Account No: 01880719
Address: Lloyds TSB, 47 Milsom St., Bath BA1 1DN, UK
If subscribing from an EU country please give your VAT/TVA/BTW number
NB in all cases payment must be received before subscription can commence. If you require an
invoice for your records please tick here Please send me an invoice for my records
This subscription is for me personally company
Signed: Date:
Name in capitals:
FOR OFFICE USE ONLY. INVOICE NO. / /

Currency investment in Asia –
a market that can’t be ignored
By Seppo Leskinen, Head of Asset Management, Asia - Paci!c and
Magnus Prim, Chief Strategist, Asia at SEB
The global economic growth now seems

set to slow again and we put a 25%
risk for a double dip scenario on the
global front. Obviously such a potential
outcome also constitutes a risk to a still
export dependent Asia. Still, a range of
factors may mitigate the negative impact
a cooling of global demand would have.
We believe there are a range of positive
factors that will continue to attract capital
in"ows and help not only to strengthen
regional currencies but also help Asia to
further develop and increase the depth
and liquidity of its capital markets.

REGIONAL REPORT
Economic
outperformance
For developing Asia as a whole we
are now forecasting growth over 8%
for 2010. India and China remains
the locomotives for this impressive
performance (although they in terms
of growth rates will be outshined
by Singapore this year). Even such
impressive growth rates actually
include expectations of a slowdown
in H2 (in other words !rst half growth
was in many cases exceptional).
Contribution to global growth 3yr ma
The main risk remains that another contraction in the

industrialized world materializes but as highlighted
below the region has room to counteract the negative
impact from such a development through both !scal
and monetary policy stimulus.
Lower debt levels

While the developed world struggles with soaring
debt levels approaching and likely to surpass 100% of
GDP, the rise in debt in emerging markets has been
very modest, standing at around 40% of GDP despite
signi!cant !scal stimulus. This not only means there
is little need to cut back on spending, thus weighing
on growth, it also gives the countries in the region
plenty of !scal room to provide further stimulus
should it again be necessary.
Higher interest rates

The strong bounce back in growth has made central
banks in the region begin to normalise interest rates
much earlier than the majority of central banks in the
developed world, and from a higher starting point.
This not only means that there is plenty of room for
monetary policy stimulus to be resumed should it
again be necessary but it also means we presently
are seeing a pronounced widening of interest rates
spreads that is likely to give a further boost to
already strong capital in"ows due to an increasingly
attractive carry.

Currency investment in Asia – a market that can’t be ignored
of total foreign holdings

in Korean Treasury bonds
(one of the most liquid in
Asia). All this development
is creating a virtuous cycle
where increased interest
to invest in Asian markets
begets more interest to invest.
Overall, the effect tends to
be strong capital in"ows and
appreciation pressure on the
regional currencies.
Interventions
still constitute
a risk
Strong foreign capital in"ows
Source: OECD, SEB are not always a good thing,
especially if they consist of
“hot money” that can severely increase the risk of
Current account surpluses big out"ows on back of unforeseen events, but also
and capital in"ows because of the appreciation pressure they contribute

to when things are going well. Despite its strong
Virtually all countries in Asia are running current fundamentals and promising emerging shift in
account surpluses. This is partly due to strong economic drivers, the region remains export driven to
exports and excess savings but to an increasing a large extent.
degree also due to rising capital in"ows.
In particular, this is evident in the bond This means there is a real concern on part of
market where local currency bond authorities to lose competitive advantages
market has grown by an annual if their respective currency appreciates
18.8% as of end June with USD too much. Thus, a policy of intervention
4.8trn now in outstanding has been adopted. This behaviour has
papers. Contributing to brought up regional FX
this welcome deepening reserves to record levels
of the local bond and is running the risk
markets is increasing of creating a “beggar
foreign demand. thy neighbour”
According to the behaviour, a risk
most recent data that has been
foreigners now hold further underlined
27.4% of Indonesian following Japan’s
government debt (popular recent interventions.
carry position with foreign This is however not
investors), 18.1% of Malaysia our core scenario.
and 7.4% of sovereign debt in S.
Korea. While regional central
banks don’t report
Further, there is also increasing exactly how much
demand within the region they intervene, it is a
with China starting to make well known fact that
an impact. For example, China most prefer to attempt
now account for about 10% to “smooth out”

REGIONAL REPORT
Foreign Holdings of LCY Government Bonds (% of Total)
currency movements, or slow down the pace

of appreciation in the case of Asia, rather than “While there still
turning an established trend. are certain risks
associated with
exposure to the
Strong interest set to Asian region it

remains a compelling
remain – Our favourites case and we foresee

a continued increase
While there still are certain risks associated in capital in"ows
with exposure to the Asian region it ahead..”
remains a compelling case and we foresee a
continued increase in capital in"ows ahead, a
SEPPO LESKINEN
development that will lead to further

lagging its regional peers. Arguably fundamentals

are not quite as solid as in other peer countries but
the downside risk to taking on a long position is also
likely limited due to the big support provided from
signi!cant remittances (well over 10% of
GDP).
“My own experience
is that the EM Short USD/KRW: One of the more liquid
strategies in general positions you can hold in Asia and while the
tend to perform better room for strengthening may be somewhat
than the strategies less than in some other countries in the
focussing on majors.” region, this particular fact is compensated by
the certainty we have on the direction.
Currency Wars
The summer of 2010 will be remembered for many
reasons by currency managers and our team was no
exception.
The month of May was dominated by the European

Debt crises and the inertia of the European politicians
to deal with the issues in a timely fashion caused the
markets to question the very existence of the single
currency itself. The impact on the currency markets
was immense, with one US bank estimating that
global currency volatility during the month was the
highest since Bretton Woods.
Our SEB Multi Manager currency fund entered the

month poorly positioned for the shock, with legacy
MAGNUS PRIM positions generally being long Emerging Markets,
Commodity Currencies, and ‘Carry’ against a short
appreciation of regional currencies. In a historical USD. This seems to have been experience that was
perspective currencies are by no means on any levels shared widely among currency managers.
that can be considered extreme or out of line with
fundamentals yet. None is yet back at pre Asian crisis The summer months June, July and August continued
levels. with high volatility, with weakening data out of
the US leading to a market dominated by the Risk
In all, while there is, in this environment, no lack On / Risk Off paradigm. This period saw many
of attractive regional currencies to go long we still asset classes becoming highly correlated, and
maintain active currency trading was further hindered by a
some favourites we believe have the potential to out- succession of negative news events for both the EUR
perform. and then the USD. These lead to numerous sudden
and rapid reversals in the direction of many currency
Short USD/IDR: This trade has been our favourite pairs.
for some time. Not only is there a signi!cant carry
associated with any long IDR position but also The direction-less volatility witnessed during
fundamentals continue to improve in the country with these months meant the managers in our portfolio
Asia’s third largest population. performed poorly during the summer. Since we have
always favoured managers who take a more relative
Short USD/PHP: This is one of the currencies in value approach, and utilise active risk control, these
the region that has recovered the least in terms of conditions were highly unsuitable.
the value seen before the Asian crisis. As such it is

REGIONAL REPORT
The events over the summer have caused dislocation levels to exhibit periods of high correlation to a
in many !nancial markets, not least in FX, where particular factor, and equally we would also expect
many currencies have been driven away from any periods of strong negative correlation in the future.
measure of fundamental fair value. Furthermore, Finally in September we saw continued tepid data
central banks around the world are increasingly out of the US, and an acknowledgement from the
focused on exchange rates as a component of Federal Reserve that further monetary stimulus
monetary policy, and their actions are likely to create may be necessary to protect jobs and growth. This
opportunities for currency managers to exploit. The spurred investors to sell US Dollars, with the US
military terminology has been launched and central Dollar Index falling by nearly 5% on the month.
bankers are talking about “currency wars”. Bene!ciaries included both the Australian Dollar and
South African Rand (both of which gained over 6%,
The summer market surprised us with a temporary supported by the ongoing strength in commodities),
increase of correlation to the equity market. and the Euro, which gained nearly 7%, despite
Historically, SEB MMCF has exhibited a low ongoing concerns over Ireland’s spiralling de!cit.
correlation to the MSCI world, with the correlation
since inception at around 0.2, and the rolling 12m In Asia, Japan intervened in the currency
normally ranging from -0.2 to +0.2. However, over the markets for the !rst time in 6 years, causing
past 6 months, this has leapt to around 0.75. the Yen to weaken 3% in a day – although it
later regained the losses to end the month
Although this is a concern, we believe this to be a "at. Asian emerging markets had a strong
case of episodic correlation caused by the market month, posting gains of around 3%,
shock caused in May. It would not be unusual aided by a steady appreciation of
for something that is normally correlated at low some 1.5% in the Chinese Yuan.

Small numbers
Our !rst slight surprise is that the
number of absolute return currency
strategies in Asia is actually quite low.
When we look at our currency manager
data base that has nearly 300 managers
We are surprised that the number
of Asian managers doesn’t go much
beyond 10% of those who we track. The
number will not grow much even if we
include those larger names that operate
from multiple sites and a small number
Figure 1: 2006-2009 Europe domiciled funds investing in Emerging Asia
of Australian names.
As a result of the change in the market conditions The low representation of Asian strategies can not be
we experienced very strong positive performance in explained by the macro economical situation in Asia.
the month of September as many of our managers The capital "ows clearly show that the Asian currency
were well positioned for the weakness in the US denominated investments are growing – see the capital
Dollar. The biggest contributions came from our carry "ows from European domiciled funds (see Fig 1).
strategy (mainly from long positions in South African
Rand, Hungarian Forint, and Turkish Lira), and our It looks like the other asset classes than currency has
Emerging Market strategies (which bene!ted from been focussing on the Asian growth story more than
strong investor "ows into most Developing countries our currency managers. However talking to local
during the month). Asian investors and asset managers they do feel the
pain from the strength of their own currency against
Perspectives on Asian
the revenues from their international portfolios.
Currency Managers Asian managers among

When talking about Asian currency managers we
include managers who are both based in Asia – top performers
Paci!c and those whose strategy has major element of The Barclay Hedge Alternative Investment Database
Asian currencies. (see Fig 2) shows a ranking of top 10 currency
Figure 2: Top 10 Currency Traders managing greater than $100M. Source: BarclayHedge

REGIONAL REPORT
managers based on compounded annual return.

These managers are almost all involves in Asian • There is still room for further strength in many
currencies although Cambridge Asian Markets Asian currencies and some commentators
strategy is the only pure one. expect further 30% strengthening on Asian
currencies and we are personally surprised
Our experience is that the EM managers in general when we !nd out that DLR / IDR today is
tend to perform better than the strategies focussing about the same level as it was 8 – 10 years ago!
on majors. Our own Asian specialist managers have
clearly been the top performers since inception nearly • The Renminbi market is opening up and we
3 years ago. all read about both ICAP and Reuters been
ready to offer execution in that market.
The currency investment • The regulatory framework for setting up
business going forward in a currency fund is extremely light here in

Singapore and we are sure the similar policy
Asia will apply to Hong Kong too because we can’t
see these two centres stop competing with one
The future looks very positive for the Asian currency
another.
business. There is increasing demand for both absolute
return and overlay strategies among Asian investors:
The future is bright and we will leave you with the
thought of the “Asian middle class revolution” that is
• The economies are growing and getting more
predicted by a research report submitted by the Asian
open and exposed
Development Bank. Their research shows that Asia’s
middle class who spends today some $ 4.3 trillion
• The portfolio allocation towards Asian
will in 20 years time be spending $ 32 trillion i.e. 43%
managers is increasing and today 80 % of of global consumption.
Asian Hedge funds allocation are coming
outside Asia .
• The Asian currency risk and exposure is

“exported” to the western portfolio investors.
The various benchmarks have ever larger
portion of Asian exposure due to relative
strength of their economies.

INVESTMENT PRODUCTS
Listed currency vehicles –

helping investors to make
the right choices
By Axel Merk
Low correlations to traditional asset classes, inherent market inef!ciencies and potential
pro!t opportunities, relatively low volatility and high levels of liquidity may explain the
increase in investor demand for currency exposure.1 Global currency market turnover has
risen substantially, from $3.3 trillion in average daily turnover in April 2007 to $4.0 trillion
in 2010. This increase has been largely driven by increased trading activity in a category of
investors including hedge funds, pension funds, mutual funds and insurance companies,
where turnover rose by 42% during this same time period.2
T
he absolute number of listed currency in increasing demand for currency exposure: many
investment vehicles available, along with investors came to the harsh realization that their
the total size of assets managed, has grown portfolios were not adequately diversi!ed to protect
signi!cantly over recent years. This has occurred against downside risks. Indeed, !nding uncorrelated
amid a global !nancial crisis and subsequent crash in asset classes has proven increasingly dif!cult: most
the value of many !nancial assets. The !nancial crisis asset classes moved up in tandem approaching
which began in 2008 may have acted as a catalyst the credit crisis; most asset classes moved down
1 For a detailed description of the unique attributes displayed by the currency asset class, please see our White Papers titled “Portfolio Bene!ts of The Currency Asset Class”
and “The Currency Asset Class: A New Era of Investment Opportunity”
2 Bank For International Settlements (BIS) Triennial Central Bank Survey, April 2010

Listed currency vehicles – helping investors to make the right choices
together as the credit

crisis took hold; and
most asset classes
continue to move in
lock-step today. In
an environment with
increased correlations
across many asset
classes, portfolio
diversi!cation is of the
utmost importance.
The currency asset
class may help meet
this objective. There
are three types of listed
currency investment
vehicles commonly
Number of Listed Currency Vehicles
available to investors:
Growth of Listed Currency

currency mutual funds,
currency exchange traded funds (ETFs) and currency
Investment Vehicles
exchange traded notes (ETNs).
As a result of the increased investment demand, Aggregate assets under management for listed
many new currency mutual funds, currency ETFs currency investment vehicles grew at an annualized
and currency ETNs have been launched over the pace exceeding 80% between December 2004 and
past few years. Investors now have greater options June 20101. As of December 31, 2004, total assets
available for currency investing, a trend that is likely managed in listed currency investment vehicles
to continue as the currency asset class becomes totaled $244 million; in contrast, aggregate assets
an evermore established component of investors managed as of June 30, 2010 stood at $6.5 billion.
portfolios. Currency mutual funds, ETFs and ETNs As of December 31, 2004, only one currency mutual
all share similarities, and each vehicle also displays fund was available for investment. The !rst currency
unique characteristics and distinct risk and return ETF was launched in 2005 and the !rst ETN was
pro!les. Investors should be cognizant of these launched in 2007. Since then, we have witnessed
differences when considering a currency investment. rapid growth in the number of currency investment
vehicles available: as
of June 30, 2010, there
were a combined total
of 43 listed currency
investment vehicles (14
currency mutual funds;
19 currency ETFs; 10
currency ETNs).
Currency
Mutual
Funds
Mutual funds are open-
end funds, regulated
primarily under the
Listed Currency Vehicle Assets Under Management Investment Company

INVESTMENT PRODUCTS
Act of 1940.2 A mutual fund is a type of investment

company, legally known as an open-end company.
The speci!c objectives of any currency mutual fund
will differ from one fund to another, and will be
outlined in its prospectus. However, its
investment approach can generally be
“Investors now
classi!ed as one of two types: directional have greater options
or non-directional. Directional approaches available for currency
generally take a speci!ed position in a investing, a trend
managed basket of currencies relative to that is likely to
one currency, typically either long or short continue as the
vs. the U.S. dollar. In contrast, a non- currency asset
directional strategy has no pre-determined class becomes an
evermore established
view on any one currency; non-directional
component of
strategies may take long or short positions investors portfolios.”
in a variety of currencies.
Currency mutual funds typically invest in

wide baskets of currencies and typically don’t track a
prede!ned index. Therefore the portfolio rebalancing
and management of currency exposures tends to be
driven by the portfolio manager of the mutual fund,
who invests according to the investment objectives
outlined in the prospectus. Speci!c holdings are AXEL MERK
required to be reported semi-annually, though many

report more frequently. Investment Company Act of 1940. An ETF allows
investors to buy and sell shares that represent a
Investors typically do not purchase mutual fund fractional ownership of a portfolio of securities.
shares in the secondary market. Rather, shares This portfolio of securities typically tracks, as
are purchased from the fund itself (usually via a closely as possible, an underlying index, such that
broker). The price investors pay for a share is the the investment return produced re"ects, as closely
approximate NAV per share. The NAV for a mutual as possible, the investment return that would be
fund is typically calculated at the close of the trading produced by investing directly in the underlying
day, therefore the price an investor pays for a share index.
will be determined at the close of the trading day
in which the investor places their order. As such, a As opposed to an ETF, an ETN is not a fund, nor
mutual fund generally does not trade at a premium registered under the Investment Company Act
or discount to its NAV, nor does it typically trade of 1940. Rather, an ETN is a debt instrument.
continuously throughout the trading day. This is an often overlooked, yet critical aspect of
an ETN. Notably, there is counterparty risk with
Currency ETFs and ETNs ETNs; investors should understand that while the
objective of an ETN is to provide returns that track
The objective of most ETFs or ETNs, currency or some de!nable benchmark or index, ultimately the
not, is to reliably track an underlying index, less !nancial health of the issuer may have a marked
any expense ratio. This is not the case for actively effect on whether coupons, or even the principle of
managed ETFs; presently, there are no actively an ETN, will actually be paid. Essentially, an ETN is
managed currency ETFs. Generally speaking, a another way that a !nancial organization can access
currency ETF or ETN will have a de!ned index debt !nancing. For these organizations, an ETN
before it is launched. This index, its structure and is treated the same way as any other issued debt
rebalancing, if any, will be outlined in the prospectus. instrument: it is a liability for the issuer. From an
An ETF is an open-ended investment company or investor’s standpoint, buying an ETN is essentially
unit investment trust that is registered under the the same as purchasing a bond of that !nancial
1 Data source: Bloomberg, Morningstar. Calculation based on total assets under management as of 12/31/04 and 06/30/10.
2 The full text of the Investment Company Act of 1940 can be found on the SEC’s website. Please see: http://www.sec.gov/about/laws/ica40.pdf
organization; an ETN could be considered a special trade an ETF or ETN multiple times a day. There may,
case "oating rate note, with the coupons, if any, and at times, be a mismatch between supply and demand
principle typically linked to an underlying index or for the securities, which may cause the price of each
benchmark, less any fees. As such, investors may vehicle to deviate from the net asset value (NAV) of
want to consider assessing the !nancial health of any the underlying portfolio of securities (in the case of an
ETN issuer before investing. ETF) or the asset value underlying the debt obligation
(in the case of an ETN). In fact, some investors trade
A key similarity between currency ETFs and ETNs on this unique attribute alone; devising trading rules
is that both are typically designed to track a de!ned based upon whether an ETF or ETN is trading at a
index or benchmark. Generally speaking, the simpler premium or discount.
the index, the easier it is for any ETF or ETN manager
to track it. In this respect, many currency ETFs and
ETNs tend to take a simple directional approach Which Investment Vehicle?
to currency investing. A simpler index also makes There are numerous factors that may ultimately
it easier to communicate to investors the objective impact a currency investment decision. Investors may
of the investment vehicle, and may give investors want to consider the following issues when assessing
a greater level of clarity surrounding what they the various listed currency investment vehicles.
should expect in terms of a risk-return pro!le. For
currencies, the simplest index is often to track the Investment Comparison
value of one currency, as measured in U.S. dollars. Generally speaking, currency investment vehicles
As such, many single currency ETFs and ETNs have can be classi!ed as either static baskets or managed
been launched in recent years – from the Australian baskets, and directional or non-directional in
dollar to the euro to the Japanese yen. As of June investment approach. Static baskets refer to set
30, 2010, 22 of the 29 listed currency ETFs and ETNs positions in a de!ned basket of currencies, or
were aimed at tracking a single currency. In addition, a basket which is predetermined by some set
leveraged currency ETFs and ETNs have also been formula (in many cases the “basket” is a single
launched. The aim of a leveraged ETF or ETN is to currency), whereas a managed basket vehicle
replicate some multiple of the underlying index, refers to an actively managed basket of currencies,
such as 200% (2x). As of June 30, 2010 there were two oftentimes having no predetermined allocation.
leveraged ETNs, both aimed at replicating 200% of Typically, currency ETFs and ETNs tend to be static
the performance of the euro. baskets, with many vehicles following a directional
investment approach. On the other hand, mutual
Both ETFs and ETNs are listed on an exchange and funds tend to follow a managed basket investment
can be bought and sold throughout the trading day. approach, and may be both directional and non-
This allows investors to take advantage of very short directional. These dynamics are visually depicted in
movements in price; indeed, some investors may the chart below:
Investment Style
In many ways, the decision of
whether to invest in a currency
ETF or ETN, or a currency mutual
fund, parallels the decision of
whether to invest in an individual
equity or an equity mutual fund. In
general, when investing in an ETF
or ETN, one must !rst understand
the underlying index, and then
formulate an opinion on that index.
In many instances the underlying
index is a single currency, so
investors must ask themselves
whether or not they believe that

INVESTMENT PRODUCTS
Another consideration is
the "exibility the different
vehicles have with respect
to trading currencies.
Currencies can be traded
24 hours every business
day, yet ETFs and ETNs
can typically only rebalance
during U.S. trading hours.
Currency mutual funds are
often able to trade while the
U.S. markets are closed. This
can be bene!cial should
signi!cant news "ow occur
overnight, and with regards
to some of the less liquid
Annualized Volatility of Returns currencies available, which
may exhibit higher levels of
particular currency will appreciate or depreciate, liquidity at times when the U.S. markets are closed (for
and over what timeframe. This is similar to how example, select Asian currencies are often more liquid
an investor might assess the future price direction during Asian trading hours).
of an individual stock. It logically follows that
many currency ETFs and ETNs are better suited for Volatility
short-term, tactical investors who have very strong Because the value of currency ETFs and ETNs are
convictions on one currency or another, or a small typically tied to a one-way directional view on one
basket of currencies, over a speci!ed time frame. currency, or a small basket of currencies, whereas
Oftentimes the holding period may be quite small, mutual funds typically invest in a larger basket of
sometimes intra-day, so the ability to trade ETFs and currencies, the return series generated by ETFs and
ETNs multiple times a day may be advantageous for ETNs have historically often been more volatile
such investors. than those exhibited by currency mutual funds.
Importantly, currency mutual funds have the ability
On the other hand, because mutual funds typically to adjust currency allocations in such a way that
invest in an actively managed basket of currencies, minimizes expected volatility of returns. In fact, many
often take long and short positions, and don’t currency mutual funds speci!cally employ such a
typically track a pre-determined index, mutual funds strategy in the overall allocation process.
may not lend themselves as well to short-term, high-
The chart above depicts annualized volatility of
turnover investors.
returns for unleveraged currency mutual funds and
ETFs/ETNs for calendar years 2008, 2009 and for year
Rather, the mutual fund’s portfolio managers
to date 2010 (through June 30, 2010). For comparison
typically rebalance and update portfolio allocations
purposes, we have also included the annualized
based on specialized investment processes and
volatility exhibited by the S&P 500 index. Note that
perceived implications of market dynamics.
leveraged vehicles have been excluded from the
Moreover, because currency mutual funds are below comparison
generally priced only once per day, they don’t lend
themselves to very short term trading strategies (day It is also possible that a currency ETF does not
trading currency mutual funds, for example, is not track its underlying index, commonly referred to
possible). As such, mutual funds may be more suited as “tracking error”. This can be caused when the
to an investor who is seeking the diversi!cation manager is unable to invest in securities such that
aspects of the currency asset class over the medium the NAV of the fund does not reliably track the
to long-term, and who personally does not wish underlying index. Currency mutual funds, because
to speculate on the short-term price movements of they generally do not track a pre-de!ned index,
speci!c currencies. are not subject to “tracking error” in this respect.

of the active management

approach employed by many
mutual funds, which often
requires a higher level of
process specialization and
resources.
Leveraged funds tend to have

higher expense ratios, as
the use of leverage typically
generates interest expenses,
which tends to be re"ected
in the overall expense ratio.
Investors should be cognizant
of the fee structure charged
by any currency investment
Average Annual Expense Ratio vehicle before investing.
The chart (left) outlines the
Expenses average and range of expense ratios for the various
As outlined above, currency ETFs and ETNs tend listed currency investment vehicles:
to follow simpler, more easily communicated
investment approaches relative to mutual funds. As
such, currency ETFs and ETNs tend to have lower fee Summary
structures. As of June 30, 2010, many currency ETF In conclusion, when considering a listed currency
and ETN expense ratios were approximately 0.5%, investment, investors may want to !rst consider the
whereas the average fee charged by currency mutual type of investment style they wish to pursue. An
funds was approximately 1.5%. Some currency investor’s style has a large bearing on which type of
mutual funds have front-end and/or back-end sales listed currency vehicle they may ultimately choose,
loads in addition to a management fee, although no- given the attributes unique to each vehicle outlined
load funds are also available. These additional fees above. Generally speaking, when an investor takes
and higher expense ratios are generally representative a more tactical, short-term approach to investing,
with a higher level of turnover and
short expected holding period, and
is willing to accept a higher level of
volatility, they may wish to consider
ETFs or ETNs.
On the other hand, investors seeking

the portfolio diversi!cation bene!ts
of the currency asset class over the
medium and long-term, with a longer
anticipated holding period may wish
to consider currency mutual funds.
If investors have the time and

expertise to pick speci!c currencies,
currency ETFs or ETNs may be the
better option; if investors wish to
access the bene!ts of the currency
asset class, but haven’t the time to
pick speci!c currencies, then currency
mutual funds may be more feasible.

ETF Securities – World’s largest
Exchange Traded Currency platform
E!
NOW AVAI LABL
E! NOW AVAI LABL
40 Currency ETCs providing long or

short exposure to G-10 currencies
and now emerging markets currencies
• Europe’s first ETCs providing exposure to the Chinese Renminbi or Indian Rupee on the London Stock Exchange (“LSE”):
ETFS Short CNY Long USD (SCNY)*, S Short CNY Long USD (SCNY)*, ETFS Long CNY Short USD (LCNY)*, ETFS Short
INR Long USD (SINR)*, ETFS Long INR Short USD (LINR)*
• LSE traded, liquid and cost efficient
• Open ended and can be created and redeemed to demand by authorised participants
• Exposure to world’s most liquid asset class1
• Multiple market makers
• Traded on the LSE through your stock broker
For more information T: +44 (0) 20 7448 4330 www.etfsecurities.com
The advertisement is issued by ETF Securities Marketing LLP (“ETFSM”) and is intended for and directed towards persons who are considered professional investors (as defined in the
UK Financial Services and Markets Act or its equivalent under applicable law or regulation in the relevant jurisdiction) and have professional experience in investing. It has been approved
for the purposes of Section 21 of the Financial Services and Markets Act 2000 (“the Act”) by Flow Traders B.V. The products in this advertisement are issued by ETFS Foreign Exchange
Limited (“FXL”) which is authorised and regulated by the Jersey Financial Services Commission. The United Kingdom Listing Authority is the ‘home regulator’ for purposes of listing and
passporting the FXL prospectus under the Prospectus Directive. The products in this advertisement may or may not be suitable for a particular investor. You should obtain your own
independent financial, taxation and legal advice before making any decisions about any investment. Investment in the products discussed carry with it certain risks, including those set
out in the relevant prospectus, which can be obtained from the ETFSM at +44 (0)20 7448 4330 or info@etfsecurities.com.
*London Stock Exchange codes
1
BIS Triennial survey 2007; World Federation of Exchanges 2007.
Achieving realistically
sustainable returns with
FX Managed Accounts
Achieving sustainable success with Managed FX requires investors to go through a comprehensive
process by questioning their advisor of choice. In this article Timothy J. Maxwell, Principal at QP
Capital LLC (tmaxwell@qpcapital.com), outlines a practical guide to the investigative process.
I
n the past two decades, Managed FX has emerged
as the stellar class of alternative managed
investments (see Fig 1.).
As seen from Fig. 2, the size of the estimated current

Managed FX industry (under $20B) is less than 1,000th
of the Mutual Fund industry ($26T), less than 100th of
the Hedge Fund industry ($2.2T) and less than a 10th of
the CTA industry ($200B). Due to recent overwhelming
Fig 2. Relative Industry Size. Source: QP Capital LLC © 2010
interest in Retail FX, the Managed FX sector is poised to
grow dramatically in the next few decades. where the trading is carried out by the advisor. The
principle of PAMM functioning is sharing the pro!ts
There are numerous advantages in utilizing the and losses in proportion.
Managed FX structure (see Table 1 on the last page of
this article).
Portfolio allocation
Managed FX Work"ow There are many schools of thought on this concept,
but a 10%-20% range is the most accepted. Managed
Fig. 3 overleaf shows a typical Managed FX work"ow. FX allocations seem to increase in times of worldwide
!nancial hardship, as stock markets don’t generate
PAMM accounts suf!cient returns or create losses for investors.

Investors should start with a small portion of their
PAMM (Percentage Allocation Management Module) portfolio (10%-15%) and increase their allocations
is a trading account that consists of multiple investor once they get comfortable with the process (assuming
accounts which form one whole trading structure, good performance).
Fig 1. Asset Class Evolution. Source: QP Capital LLC © 2010

INVESTMENT PRODUCTS

Achieving realistically sustainable returns with FX Managed Accounts
Fig 3. Managed FX Work"ow. Source: QP Capital LLC © 2010
Regulations Trading methodology

Starting from October 18, 2010, the CFTC
Both technical and fundamental approaches, as
(Commodity Futures Trading Commission) requires
well as a combination of two, work equally well in
all FX managers in the US to register with the NFA
Managed FX. Various trading principles, style and
(National Futures Association) as a CTA (Commodity
methods could be successful, as long as they produce
Trading Advisor). FX managers must now comply
steady and smooth returns, while managing risk over
with the same strict set of guidelines as the CTA have
been doing for many years. a long period of time.
Long-term trading offers reduced turnover expense

Funds safety (spreads/interest), while short-term offers greater
"exibility and control. Trading in ultra-short
In today’s world of outright fraud by many hedge
timeframe (scalping) does not produce good results
fund “managers”, funds safety (part of operational
risk) is a major concern. When dealing with a Managed due to liquidity, spreads and slippage issues. A lot of
FX advisor, there are three inherent areas of concern: system developers create scalping bots (automated
programs) that produce great results on paper.
However, in a real environment with a sizeable fund,
a) FX Broker Security – A reputable broker with these systems are useless.
a good pedigree is a must. Preferably, it should
be regulated by local authorities and well Proper automation of Managed FX trading is a good
capitalized. This should be researched by the idea. It eliminates trader’s emotions and errors and
advisor. The advisor should also constantly
allows for activity 24 hours a day without human
monitor the broker for any red "ags, as
intervention. The advisor should utilize the latest
seemingly even the most reputable brokers are
technologies (e.g. redundant power and internet
prone to serious fraud (e.g. Refco).
b) Custodian Stability – Generally the bank feed, co-location, etc.) in order to keep an automated
where the funds are physically held. This program running smoothly.
research should be performed by both the
Performance and reporting

advisor and broker. This aspect should also
be constantly monitored, as even the largest
!nancial institutions could fall in times of There are many important aspects of performance,
extreme crisis (e.g. Lehman Brothers).
such as history length, ROR, maximum drawdown,
c) Advisor Competency - This due diligence
positive/negative months ratio, amount of pairs
should be performed by the client. The
most crucial potential issues are volatility of traded (more is better), various risk-reward ratios.
returns and depth and length of program’s The Sharpe ratio is a good indicator of consistency of
drawdowns. Investors should keep an eye on returns. Investors want to see Sharpe of .75 and higher
program performance and consider reducing over a signi!cant period of time (one year or more).
their allocations in case of high volatility of
returns or drawdowns outside their comfort Sharpe over 1.00 over a year or longer is exceptional.
zone. Most investors seem to be comfortable Managed FX performance is typically benchmarked
with short drawdowns under 15%. against major market indices (e.g. S&P 500), as well
as managed futures (CTA) indices (e.g. NewEdge) as

Deutsche Bank
dbfx.com/ci
Trade FX with the quality pricing and execution

of the world’s no.1 FX Bank*
dbFX is ideal for hedge funds seeking to gain an entry point
to trade FX with Deutsche Bank:
- Institutional grade pricing - dbFX provides competitive spreads even during
market volatility
- Up to 100:1 leverage
- Multiple API connection types, including FIX 4.4, allow for easy integration
- Access to award winning Deutsche Bank research
- End to end back o!ce services and real-time trading activity reports
Connect to Deutsche Bank. Open a dbFX demo account today:

Visit: dbfx.com/ci
Call: +44 (0) 808-101-1122
*Euromoney FX Poll 2005 to 2010
The above information has been approved and/or communicated by Deutsche Bank AG London in accordance with appropriate local legislation and regulation. Deutsche Bank AG London is regulated for the conduct
of investment business in the UK by the Financial Services Authority. Trading in margin foreign exchange can be risky. The use of leverage in foreign exchange trading can lead to large losses as well as large gains.
Markets referred to in this publication can be highly volatile. For general information regarding the nature and risks of the proposed transaction and types of financial instruments please go to www.globalmarkets.
db.com/riskdisclosures. This product may not be appropriate for all investors. Before entering into this product you should take steps to ensure that you understand and have made an independent assessment of the
the closest alternative investment class. This allows

Drawdown frequency and time to recover largely
the investor to determine how well the advisor is
depends on the program’s frequency of trading and
performing against the overall market and its group
style. There is no speci!c metric, but generally the
of peers.
program should not experience frequent drawdowns
over 10% and should recover from drawdowns
Investors can always log into their brokerage account quickly.
and check their P/L, closed/open trades and other
basic information. Some advisors, however, provide The largest acceptable drawdown depends on the
their clients with additional performance reports with programs’ ROR (Rate Of Return) and investor’s
features like trade stats, equity charts, drawdown
pro!le. Most investors are comfortable with
analysis, won/lost pip breakdowns, pair analysis,
drawdowns under 15% on closed trades, assuming
risk-reward ratios, etc. This could be very bene!cial
good returns. The majority of investors also accept
in gauging performance.
an occasional drop slightly over 15%. Drawdowns
upwards of 30% should only be acceptable in
Drawdowns extraordinary circumstances.
There are three important aspects regarding a

program’s drawdowns (largest peak-to-valley drops Currency Pairs &
Crosses
in equity):
a) Frequency of signi!cant drawdowns Popular currencies perfectly suitable for Managed FX

(per annum) are: USD (US Dollar), CAD (Canadian Dollar), EUR
(Euro), GBP (British Pound), CHF (Swiss Franc), JPY
b) Average time to recover (in days)
(Japanese Yen), AUD (Australian Dollar) and NZD
c) Size of the largest drawdown (monthly basis)
(New Zealand Dollar). Most FX brokers offer dozens
of pairs (e.g. USD/CAD) and crosses (e.g. CAD/JPY),
based on these currencies. These pairs and crosses
offer great liquidity with good spreads and !t almost
any trading style.
Other currencies, called “exotics” (e.g.

“Managed FX RUB – Russian Rubble), are typically
performance acceptable only to speci!c programs
is typically
due to their lower liquidity and more
benchmarked
against major importantly wider spreads. Some
market indices (e.g. exceptions to that rule might be HKK
S&P 500), as well (Hong Kong Dollar), SGD (Singapore
as managed futures Dollar) and DKK (Danish Kroner), as
(CTA) indices” they offer good spreads and liquidity
when paired with US Dollar.
Spreads and Interest

Spreads are a crucial part of the Managed
FX business. Most non-ECN (Electronic
Communication Network) FX brokers
earn their revenues exclusively via the
difference in spreads they offer to
the advisor and Interbank spreads.
TIMOTHY J. MAXWELL
Working with tight spreads is even

INVESTMENT PRODUCTS
more crucial to advisors with high-volume of trading

(short-term). ECN FX brokers charge commissions It is often bene!cial to deal with mini-lots or no
instead and do not pad the interbank rates. In that minimum, as the advisor can trade precisely
case the advisor should try to negotiate the best the amount necessary, which could smooth out
possible commission rates with its broker. Every the equity curve and improve compounding.
trading night, during a rollover, the portfolio would
either gain or lose interest on every open position.
While an important aspect, the interest typically
does not play a large role in Managed FX, unless the
Introducing Brokers
There is another potential revenue stream for the
program holds positions for a long time with minimal
advisor that could be completely hidden to the
leverage, but constant negative interest. In that case
investor. This revenue comes from so-called “rebates”
the interest could add up quickly.
or “kick-backs” that the advisor might collect from
the portion of the spread from the broker. This
Program minimum and is accomplished by utilizing a third party called

“Introducing Broker” or IB. An IB introduces the
capacity clients to the broker and collects a portion of the
spreads for its efforts. That revenue is then split
Minimum starting balances vary greatly from one
between the IB and the advisor. In some cases,
advisor to another. For most advisors it ranges
the advisor is also the IB, and it realizes all of that
between $10K and $1M Investors should always
inquire about a program’s theoretical capacity and additional revenue.
current AUM (Assets Under Management). For any
successful program there must be plenty room to This practice should only be acceptable to investors
grow, as new investors, contributions and pro!ts if rebates come directly from the broker spreads,
keep rolling in. and not “padded” on top of it. If an advisor “pads”
every trade with as little as half of pip, with
suf!cient volume of trading, it becomes equal to the
Broker selection advisor charging its clients a 5%, 10% or even 20%
management fee, which is highly unethical. This also
Investors should also do due diligence on the
diminishes the performance, but guarantees a higher
advisor’s broker. Here are some key aspects of a good
income for the advisor. Investors should always
FX broker in order of greatest signi!cance:
inquire if the advisor utilizes any such practices.
Recent regulations made IB – broker relationship
more structured better protecting investors.
a) Solid Reputation – must be in business for
a long time and have a good reputation and
positive client reviews
b) Tight Spreads – either !xed or variable, the
Trading own account
spreads must be tight for all major pairs and Most Managed FX advisors have their own funds
crosses allocated to their program. This is due to all the
c) Good Customer Service – any issues must be bene!ts Managed FX has to offer, plus the full control
resolved quickly to keep downtime low over the trading. This adds additional bene!ts to the
d) Powerful Trading Software – to allow for investors, as the advisor generally works extra hard,
quick execution, minimize slippage and as his or her net worth is directly affected.
downtime
e) Flexible Manager/Client Software – must be
easy to use for clients to allocate, contribute Leverage and Notional
and withdraw funds
f) Low Minimum Trading Size – some FX brokers Funds
require the advisor to trade full-size currency Managed FX offers a signi!cant potential leverage to
lots (100,000 units). Some offer mini-lots (10,000 the advisor. Some FX brokers used to offer leverage
units). Few offer no minimum at all. up to 400:1 or higher, but with the recent Dodd-
Frank Act, the maximum leverage available to the

Table 1. Asset Class Features
US FX brokers is now limited to 50:1. In practice, 50:1 for hedge funds and CTAs. There are two types of
leverage is suf!cient for any style of trading. The fees: incentive and management. The incentive fee
sweet spot for the majority of trading programs is is based on percentage of performance pro!ts and
3X-10X. Anything above 20X only works on short- typically ranges between 20% and 25%. The incentive
term strategies, and should be used only for speci!c fee is typically charged monthly or quarterly. The
programs. Some advisors offer “Notional Funds” management fee is !xed and charged monthly,
option. An account is notionally funded when the quarterly or annually and typically ranges between 1%
advisor trades the client’s account, as if the funding and 2% of client’s allocation per annum. Some advisors
amount was higher than the actual funds on deposit charge 30%, 35% or even 50% incentive fee and/or
for that client. This frees up capital for the client,
3+% management fee. This should only be acceptable
but that capital should always be available upon
advisor’s request. It’s up to the client whether or not when the advisor’s performance is truly extraordinary.
to use this feature. The sweet spot in today’s world is 20-25% incentive fee
with 0-1% management fee for an advisor with solid
performance.
Contributions and
withdrawals Account opening
Most Managed FX advisors allow for client’s With most advisors it only takes a few days to open an
contributions and withdrawals at any given time account. This typically consists of the following steps:
and with minimal notice. To add/delete funds from
the program, the advisor would run a process called
“Re-Proportion”, that adjusts current balances and 1) Opening and funding an FX brokerage account
positions accordingly, using broker’s PAMM software. 2) Executing client agreement and LPOA
Contributions often require a minimum proportionate (Limited Power Of Attorney) with the advisor
to the initial minimum (e.g. $100K initial minimum, 3) Following an invitation hyperlink to be added
$25K minimum addition). When withdrawing, clients to the advisor’s portfolio of accounts
are often required to keep at least their initial balance
to stay in the program. Ideally, clients should not
Conclusion
withdraw any funds for a long period, so pro!ts get
reinvested for maximum gains.
By following guidelines which this article has tried
Fees to outline and conducting proper due diligence,

investors stand a good chance of achieving long-term
The fee structure for Managed FX is identical to ones success with Managed FX.

REPRINTS
For the diary

GAIM USA 2011
www.iirusa.com/gaimusa/agenda-at-a-glance.xml
January 18th - 20th 2011
NETWORK 2011
www.managedfunds.org/network2011
January 30th -February 1st, 2011
ASSET ALLOCATION SUMMIT AUSTRALIA

2011
www.terrapinn.com/2011/aasau
21st - 24th February 2011
THE ASIA FOREX FORUM

www.euromoneyconferences.com/
EventDetails/0/3405/The-Asia-Forex-Forum.html
2nd March 2011
HEDGE FUNDS WORLD MIDDLE EAST

http://www.terrapinn.com/2011/hfwme/
7th - 10th March 2011
FX INVEST EUROPE
www.fxinvesteurope.com
8th March 2011
ASIA FAMILY OFFICE FORUM

www.terrapinn.com/2011/afof
14th March 2011
BOCA
www.futuresindustry.org/boca-2011.asp
March 15th - 18th 2011
FUND FORUM ASIA

www.icbi-events.com/fundsasia
28th March - 1st April 2011
RMB WORLD CONGRESS 2011

www.terrapinn.com/2011/rmbcongress
11th - 13th April
To order reprints of any article in
FX INVEST NORTH AMERICA
Currency Investor please contact:
www.fxinvestna.com
April 13th 2011 Tel: +44 (0) 1208 821 801
Fax: +44 (0) 1208 821 803
Or e-mail Susie@currency-investor.net
October 2010 -
The Parker Blacktree Currency Index (PBCI)
The PBCI is comprised of two sub-indices: the Currency Managers Index (CMI) and the Investment Strategies Index
(ISI). The CMI Index measures the alpha generated by active currency managers. The ISI Index is a portfolio of
thematic rules-based trading strategies that decompose the market into tradable themes. The CMI comprises 65% of
the PBCI, the ISI 35%, to create diversi!ed exposure across the range of investment opportunities.
The CMI is a comprehensive multi-manager based The ISI is a diversi!ed index of rules-based
index comprised of three sub-indices: investment strategies comprised of three sub-indices:
• Macro Discretionary • Model-Driven • Macro Pressures • Risk Perception

• Diversi!ed. • Market Dynamics.
Using its proprietary FX Style Select™ style mapping, Each sub-index measures the performance of a
PGS has selected “best of breed” currency managers distinct set of currency market drivers that Blacktree
and programs to represent each of the sub-indices. has identi!ed as being critical factors in capturing
Each sub-index may include one or more managers, returns from currency markets.
depending upon the number and quality of managers
mapped.
Chart 1: PBCI Return Breakdown (October 2010) Chart 2: Manager Return Distribution (October 2010)
Although the CMI sub index was down for the The distribution of individual managers’ performance
month, the Model Driven managers performed the within the CMI (Chart 2), shows that the majority of
best once again. The ISI sub index‘s model groups the programs were negative, but with two exceptions,
generated largely "at performance. most of these programs incurred moderate losses.
Top Performers OCT Return Return (YTD) Type

As Chart 3
Model Driven
Manager 1 6.67% 6.80% (Multi Week Breakout) suggests, the
Manager 2 2.78% 9.46% Model Driven most pro!table
(Multi Week Quant/Value)
currencies
Diversified
Manager 3 2.20% 15.57% (Multi Week Blended were the
eastern
Strategy)
As the table above indicates, two of the three top European

managers in the CMI were Model-Driven programs. and emerging
The performance was noteworthy given the choppy markets,
performance of the G-10 currencies versus the which
broader universe of currency markets. Although the showed
previous month also saw superior performance by more price
Model Driven managers, this month’s outperformers appreciation
in contrast has models focused more on either versus G-10 Chart 3: PBCI Currency Returns Breakdown
fundamental inputs or EM currencies. currencies. (October 2010)

For your needs in FX, the
real exchange starts here
We understand that you demand access to a broad and diverse
currency market. You expect a personalized, streamlined service with
simplified administration. You need centralized mid and back office
services with best in class risk controls. You want access to capital
introduction. All of this is what UBS delivers to you.
As one of the world’s leading providers of prime brokerage services,

we also have an impressive track record and reputation in FX. Our
strong order flow and significant market share offers you superior
pricing and execution with every trade. With both global market
coverage and experienced local account managers, you benefit from
the highest quality support throughout each stage of the deal cycle.
With our own extensive in-house IT infrastructure, we can tailor
connectivity and user-friendly web-based delivery solutions to meet
your individual needs.
We’re not just committed to our leadership in the FX business,

but also to enabling you to be a leader in yours.
Contact us to exchange ideas on how we can work together.
Ed Pla Brian McDermott

Tel. +41-44-239 39 19 Tel. +1-203-719 4042
edward.pla@ubs.com brian.mcdermott@ubs.com
www.ubs.com/fx
Best FX Post Trade Service, FX Week 2009. No.2 Global FX House, Euromoney 2005-2010. © UBS 2010. All rights reserved. 04364 06/10 CurrInv

Currency Investor Magazine Autumn 2010

Hochgeladen von

Dokumentinformationen

Originalbeschreibung:

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Currency Investor Magazine Autumn 2010

Hochgeladen von

Copyright:

Verfügbare Formate

Currency management

For more information call +44 (0)20 7497 1900 or visit

for managers in their battle to Charles Harris Simon Moss

JOHN MCCANN FELIX SHIPKEVITCH THANOS PAPASAVVAS PHILIP POOLE

16 The New Normal -

MAGNUS PRIM and SEPPO LESKINEN AXEL MERK TIM MAXWELL

COMPANIES IN THIS ISSUE

02 Currency Investor | Autumn 2010

LEADER INVESTOR PERSPECTIVES

26. Alternative approaches to Currency INVESTMENT PRODUCTS

FUND OPERATIONS 72. Achieving realistically sustainable returns with

Autumn 2010 | Currency Investor 03

Commodity Currency Currency Fund (CEW) in

04 Currency Investor | Autumn 2010

Windham announces launch

Autumn 2010 | Currency Investor 05

Macro Currency Group

announce new Fund Commenting on the fund

06 Currency Investor | Autumn 2010

For more information, please contact:

+44 207 163 2679 +44 207 163 1102

Nomura launches currency fund to

08 Currency Investor | Autumn 2010

Record appoints new CEO

for global funds Collins as Chief Executive

Currency Fund manager

Autumn 2010 | Currency Investor 09

TD AMERITRADE Institutional launches UMAX

10 Currency Investor | Autumn 2010

Autumn 2010 | Currency Investor 11

Although we saw a slight decline in options turnover

12 Currency Investor | Autumn 2010

In addition to changes in G10, we also saw increased

Overall, therefore, London retains its dominance, but

“We believe that

2. The survey is constructed by collecting data about

Autumn 2010 | Currency Investor 13

The rise in the Australian and Canadian Dollar

14 Currency Investor | Autumn 2010

Thirdly, an emerging markets currency portfolio

Whilst G10 currencies still dominate the market, the

seen this effect taking place in some emerging market Conclusion

Autumn 2010 | Currency Investor 15

16 Currency Investor | Autumn 2010

Is the benchmark zero or

on earlier hedge fund research, and several

• Carry – Borrowing a low interest rate currency

Pojarliev and Levich use a 4-factor regression model

Why should institutional

The New Normal

3. Personal investments - Fine Even Euro trades like an

Art or Gold? emerging market when you

Autumn 2010 | Currency Investor 19

20 Currency Investor | Autumn 2010

Autumn 2010 | Currency Investor 21

“At that point they would switch styles or reverse

He accepts this can become a little

“On the other side, break out/momentum ‘long

To an extent the level of the debate can become akin

Risk aversion models

22 Currency Investor | Autumn 2010

“In both recognising alpha and the importance of

Autumn 2010 | Currency Investor 23