The Future of Currency Investing in Institutional Portfolios

Michael Melvin

The role of currencies in institutional investor portfolios has undergone a dynamic path since the early 1990s. Currencies were once basically a nuisance, something to be dealt with out of necessity in order to acquire and hold foreign bond and equity portfolios. Then, over time, empirical evidence of successful performance led to the emergence of currencies as a separate asset class and source of alpha. By the early 2000s, investment consultants had recognised this role of currencies as an asset with low correlation to bonds and equities, and began to recommend currency mandates to their clients. The pre-crisis years from 2003 to 2007 were the heyday of active currency mandates, with the size of assets under management (AUM) growing dramatically for the leading active currency managers.

The financial crisis changed everything. Many managers suffered significant underperformance in 2007 and the following years, so that consultant support withered and many institutional investors lost faith in their currency programme. Consequently, AUM fell and active currency management played a much smaller role in the investment conversations of institutional investors. There are no definitive