Investment-style benchmarks such as value
investor, growth or quantitative identify
money management approaches in every giant investment sector
with one glaring exception: the $4 trillion foreign exchange
marketplace. Forget dozens of terms that money managers use to
compare performance in equity and fixed-income markets. In
currency markets the chief benchmark is zero. At the end of the
day, traders either make money or they dont.
The status quo needs to change, especially now, say authors
Richard Levich at NYU Stern and Momtchil Pojarliev at
Hathersage Capital. Investors mindful of risks and hefty costs
often a 2 percent management fee and 20 percent of
excess profits deserve to know which currency managers
really deliver their moneys worth. A landscape with
scarce returns adds urgency.
If currency managers are charging a substantial
management fee, Levich says, can you replicate
their strategy with simple currency trades in most
money-management tool kits? The new paper fine-tunes
their evidence that three basic ways to manage currency
portfolios dominate most outcomes in currency markets, and any
skilled money manager can replicate them.
Historically, currency trading has resisted style
comparisons. Experts have trouble just agreeing that currency
merits status as an asset class akin to stocks, bonds or real
estate. Investors who own stocks, or gold, or a treasury bond
can point to underlying assets. Whats the
underlying in currency? says Levich. For that matter,
where is the annual meeting? How do investors vote their
proxies? Where are the financial statements?
Such is the debate that a senior currency trader at FXDD
declined to tell Institutional Investor through the
firms public relations person whether in his view
currency constitutes an asset class.
Unlike more traditional asset classes, unseen and capricious
forces play havoc with currency markets. Investors get
the jitters for good reason, says Levich. Fundamental
values are elusive. Central banks intervene in ways that equity
markets would never tolerate. Trading systems for executing
currency transactions clear through a separate set of
institutions, currency traders operate with unique rules and
informed monitors are sorely lacking even if they knew exactly
what to look for.
Levich and Pojarliev separate currency traders into
beta grazers who settle for returns commensurate
with going risk premiums and alpha hunters who
capitalize on market inefficiencies and behavioral bias. (Wall
Street analyst Marty Liebowitz coined both terms.) Hence the
provocative title of their new research paper: Hunting
for Alpha Hunters in the Currency Jungle.