Are All Currency Managers Equal?

Abstract

Pojarliev and Levich present a post-sample study of currency fund managers showing that alpha hunters and especially alpha generators are more effective in providing diversification benefits for a global equity portfolio than currency managers who earn beta returns from popular style strategies or managers with high total returns regardless of their source. The authors’ study is unusual in that they 1) measure the alpha from currency investing using a simple factor model rather than using total excess returns, 2) use rankings of currency managers from an earlier published study and examine their performance truly out of sample, and 3) use data that reflect actual trades and returns earned by these managers so that the data are not contaminated by the usual biases in hedge fund databases. Their results suggest that a factor model approach to analyzing currency fund returns, coupled with the revealed degree of alpha and beta persistence in their data, offer institutional investors with large equity exposure a useful tool for improving performance.

TOPICS: Manager selection, factor-based models, financial crises and financial market history