Foreign exchange markets have been very busy recently, as traders try to take advantage of the dollar’s long-running decline as well as swings in the values of other currencies. Average daily volume on global currency markets last year totaled $3.21 trillion, up from $1.95 trillion in 2004, according to the most recent triannual survey by the Bank for International Settlements.
Currencies have not traditionally been a very big part of the portfolios of high-net-worth individuals and families. Recently, however, bankers and other advisers to the wealthy in the U.S. have been recommending that clients add currencies to their investments both to achieve short-term gains and to hedge growing exposure to non-U.S. investments.
JPMorgan Private Bank, for instance, offers high-net-worth clients a structured product designed around a basket of four emerging-markets currencies — the Brazilian real, the Malaysian ringgit, the Russian ruble and the Singaporean dollar — that the firm expects to appreciate on average against the dollar during the coming 12 months. The private bank has built a similar product for investors willing to bet that the euro’s long run against the dollar is nearing its end.
Rebecca Patterson, JPMorgan Private Bank’s global head of foreign exchange, says the recent trend toward more currency exposure is being driven by the increasing sophistication of wealthy investors and the room that they have in their portfolios for plenty of different asset classes these days. Most of all, Patterson says, it’s a matter of rich Americans putting a growing portion of their investment portfolios into foreign securities.
“It’s globalization. First, corporations had to get comfortable with exchange rate risk as they sourced and sold goods overseas. That trickled down to hedge fund investors and institutions. Now it’s trickling down to wealthy investors,” Patterson explains. “Historically, investors got a little wary of currencies, because they’re complicated. But that’s changing.”
According to high-net-worth investing consultants, as recently as five years ago, advisers to the wealthy recommended that their clients put no more than 10 percent of their portfolios in non-U.S. securities. Now they are more likely to recommend allocations of 20 percent to 40 percent.
Betsy Waters, director and head of dbFX Americas, Deutsche Bank’s retail foreign exchange business, launched in 2006, says the boom in foreign exchange stems partly from the proliferation of ever-faster electronic trading systems, which have narrowed bid-ask spreads and helped make the markets more transparent. “Now [forex has] come into its own as an accessible asset class,” she explains.
Waters says many of dbFX’s customers, both individuals and smaller hedge funds, are in the so-called carry trade — that is, they borrow money in countries with low short-term interest rates and lend it in places where rates are higher. Low-cost exchange-traded funds have also made forex more accessible, she notes. ETFs now cover nearly every conceivable currency and basket of currencies, and they accommodate views from the bearish to the bullish.
Some advisers avoid investing directly in currencies. “We prefer to do it through international fixed-income and equity portfolios where the portfolio manager is actively managing currency bets in conjunction with managing interest rate bets,” says Gordon Fowler Jr., chief investment officer of Philadelphia-based wealth advisory firm Glenmede Trust Co. “Trying to go and make a long-term investment in a highly traded vehicle on its own doesn’t stand up well,” he says, though he adds that “high-net-worth clients are very concerned about the fate of the U.S. dollar and are interested in doing something so their portfolios aren’t entirely tied to America’s overall health and trade position.”
Charles Lowenhaupt, chairman and chief executive officer of St. Louis–based Lowenhaupt Global Advisors, which advises ultra-high-net-worth families, agrees that the volatility in currency markets has raised big questions for his clients. The dollar’s fall, he notes, has upended traditional thinking about the U.S. currency, which has been used as the global benchmark for years.
“If you want to preserve wealth for many generations, what’s your measuring stick? That’s the question I’ve been confronting with families for the past year,” Lowenhaupt says.
