Active Currency Management
Key Benefit: Seek to generate excess returns (alpha)
Having implemented a passive strategy and selected a strategic hedge ratio (step 1) you have addressed the currency risk within your international portfolio. The next step is to decide if you would like to generate a return above your benchmark by employing active currency management. Implementing a passive strategy with active management will not only allow you to manage risk, but also to generate excess returns, which typically have a low correlation to your overall portfolio returns
Why could you expect to generate excess returns in currency markets?
We believe that changes in global currency markets are driven by three key factors:
- Investor demand for the most competitively priced goods and services
- Investor demand for capital assets with high rates of return
- Speculative interest due to trends in currencies
As a result, currency markets display the following inefficiencies which we aim to exploit:
- Currencies deviate from and revert to fair value
- Investors are biased towards currencies with higher interest rates
- Currency markets trend over longer horizons
An active currency management program would remain directly linked to your underlying international currency exposure and would typically include a strategic hedging decision (e.g. a 50% hedge of foreign exposure into the base currency)
Active Currency Management with J.P. Morgan Asset Management
A diversified, comprehensive and transparent investment process: We use quantified models wherever possible because they are consistent and unemotional. These measure the sources of demand using independent factors. This results in the following strategies:
- We avoid currencies that are significantly overvalued in the goods market and we favour currencies that are cheap
- We favor currencies with high real and nominal rates of interest and we sell those with low ones
- We favor currencies where capital markets are performing relatively strongly
- We favor currencies which are trending upwards and avoid those that are declining
A deep and experienced team
Our currency investment committee has 64 years of experience in the currency markets.* We are a team that has successfully navigated our clients' currency portfolios through a multitude of currency cycles, structural breaks and currency crises, from the break up of the ERM to the collapse of the LTCM crisis. Being part of the larger J.P. Morgan network gives us access to the firm's resources, and talent from top universities, who form part of our future portfolio manager pipeline.
A close focus on risk management
In addition to comprehensive operational risk management, independent compliance and risk management functions, and excellent technology, we focus intensely on investment risk. We have a long track record of achieving the target risk level for our clients. Our proprietary risk management systems manage your actual currency exposure to a strategic hedge ratio with active positions, tailoring the strategy to your specific guidelines, risk and return targets. No funding is required up-front for a currency portfolio as we implement our strategy using currency forward contracts (cash will be realised at settlement of the contracts).
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As of March 31, 2011. The managers seek to achieve the stated objectives. There can be no guarantee the objectives will be met. Opinions, estimates, forecasts, projections and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. There can be no guarantee they will be met.