Currency Trading Interest Increases
As demand for global-macro-themed strategies continues in 2010, BHA has noticed an uptick in investor searches for currency managers. Not surprisingly, demand typically lags performance, and that is the case here as well. Hedge Fund Research’s HFRX Currency Index shows year-to-date returns of 1.60 percent.1 BHA investor mandates have held strong with a total of 78 pure currency mandates in the second quarter and 68 through September 7 in the third quarter.
A recent Wall Street Journal article highlighted the growth in currency trading. Currently, foreign exchange (FX) trading volume is at $4 trillion a day, making currency trading the largest trading market in the world.2 This article also noted, “The $4 trillion mark represents a 20% gain from $3.3 trillion in 2007.”
Investors of all types are allocating to currency funds. In the past, investors have used currency trading mainly as a hedge for their investments in other countries. However, today, they are also using it as a way to increase returns and generate alpha in their portfolios. Investors that typically seek out global macro funds are making sure that the underlying instruments include currencies.
There are two other advantages to investing in currency funds as well: they offer diversification away from investments denominated in a particular currency and they are uncorrelated to equity markets. A fund of funds recently specified a search for stand-alone currency trading funds for these very reasons.
As investors continue to seek out non-traditional investment opportunities, BHA analysts expect current levels of currency trading to continue and develop into a longer-term trend.
1 Hedge Fund Research, HFRX Indices, September 7, 2010.
2 The Wall Street Journal, “Currency Trading Soars,” August 31, 2010.