A Discretionary Approach to Currency Investing

Adnan Akant

Currency investing started in earnest with the introduction of floating exchange rates after the breakdown of the Bretton Woods system in 1973. Although with a history spanning a period of over 40 years, the specialty of currency investing is still relatively new compared to the professional practice of investing in stocks and bonds.

In this chapter, we give a brief history of how Fischer Francis Trees and Watts (FFTW) – an institutional fixed income firm – entered the field of currency investing when it began managing global bond portfolios in the late 1980s. In the next two sections, we discuss the early evolution of FFTW’s currency process in the context of the distinct objectives of risk reduction using passive or dynamic hedging, and return enhancement, where the focus is on pure alpha generation. We then examine evidence (following Pojarliev and Levich, 2008) showing that currency managers, including FFTW, have added value as a group over long periods, and that their excess returns can be explained as consisting of true alpha – generated using a primarily discretionary approach in the case of FFTW – and currency beta factors of trend, carry and value, generated typically