Active Currency Management Part II : Is There Skill or Alpha in Currency Investing?

In this paper, we provide an overview of the main features of activecurrency management programs, highlighting the mandates and the types oftrading strategies that are often used. The traditional benchmark used to measure skill or alpha in currency investing is that the expected excess rate of return is zero. We offer an alternative standard wherethe expected rate of return is related to naive style factors based onstrategies that an investor could adopt assuming no special expertise. We review empirical evidence on the performance of both individual currency fund managers and indices of managers using the alternative benchmark. We find that a large percentage of variation in currency fund returns can be attributed to style indices. As a result, performance measures and rankings of currency funds may vary greatly depending onthe benchmark used. We review related empirical evidence on fundmanagement styles and survivorship and discuss the implications for currency management strategy and setting currency fund management fees