The currency risk factor is considered worthless in the eyes of some investors. It bears no risk premium; hence, it dilutes international returns and therefore needs to be hedged. Others consider currency an asset class in its own right due to the structure in the currency movements. The consensus now seems to be that both are true; it is a tactical asset class that should be strategically hedged.
In our PEARL and currency 2/3 (see 1/3 here) paper Currency Overlay Attribution: A Practical Guide, we take a very detailed look at currencies within performance measurement & attribution.
We describe a consistent and interpretable framework to measure and evaluate the performance of the Investment Decision Process (IDP), in the situation that currency exposures are managed independently from market exposures.
We address the question of how to evaluate the market exposures and currency overlay individually, as well as how to combine the results.
This second, 30 page whitepaper contains the following chapters:
- Karnosky and Singer attribution
- Market IDP
- Currency Overlay IDP
- Strategic Currency Overlay Benchmark
- Tactical Currency Overlay Allocation
- Currency Overlay Implementation
- Performance Base for Currency Overlay
- Example Currency Overlay Attribution
- Combining the Results of the Market and Currency Overlay IDP
- Some implications of our Methodology
- Extensions: Using Risk Premiums instead of Fully Hedged Returns
- Interaction Effect
- When Currency Exposures are not Managed Independently
Want to know how PEARL takes the currency dimension into account?Download our paper Currency Overlay Attribution: A Practical Guide here. Contact us if you want to know more about Ortec Finance’s PEARL can help you manage the currency dimension.