Currency for Return
We believe there are distinct sources of risk in currency
markets to which investors can choose to allocate capital in the
rational expectation of a long-term return. These 'currency
risk premia' are analogous to, although quite distinct from, the
more familiar equity risk premium. We manage $1.7bn of currency for
return (as at 31 December 2011).
The two currency risk premia that we have the longest track
record of exploiting are the Forward Rate Bias (FRB), also widely
known as the carry trade, and the expected appreciation of Emerging
Market currencies as their markets converge with developed
markets. In both cases we can explain the risk premium as a
rational payment to investors who are willing to bear the risk of
undertaking the economic function involved.
As well as these risk premia, currency markets show repeated
patterns of behaviour which can also be systematically
exploited. Two well-known patterns are Momentum, or the
observation that tomorrow's price movement in most currency pairs
is likely to be in the same direction as today's, and Value, or the
observation that over time developed market currencies typically
swing around a long-term 'fair value' level. Both of these
patterns are familiar to Record, and both can be exploited in the
expectation of return.
Record offers segregated mandates exploiting each of these, as
well as combining certain of them in multi-strategy
products. We also offer pooled funds principally exploiting
the FRB in both passive index-tracking and active forms and
Emerging Market currency appreciation, as well as more tactical
opportunities including the Euro Stress Fund.
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