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By Andy Woolmer and Seppo Leskinen, Head of Hedge Fund Services, Global Foreign Exchange, SEB Merchant Banking: ...Whilst you may be somewhat ‘Alpha weary’, it is obviously very important to understand what we mean by alpha in the currency area, and where it comes from. Opinions of what alpha actually is vary wildly, but for our purposes, we can define it as a value indicating an excess risk-adjusted rate of return relative to a benchmark. That is to say, the manager’s ‘value added’ expressed as a number. The value of this figure lies in comparing manager performance rather than in itself…after all investors in currency should still be drawn to absolute returns rather than the index-based returns one finds in the long-only world, but of course we now need to identify where this ‘alpha’ comes from in the currency world.

The main arguments against the existence of alpha opportunities in any given market are usually pretty similar, and run as follows: markets are efficient, with participants maximising their return at all times and removing the opportunity to beat the market. Markets represent a ‘zero sum’ game which necessarily means that one player wins and simultaneously another player loses, and so, on average, players can only hope the break even before costs. The final arguments which are peculiar to the currency markets are that central banks make money on their management and intervention activities and so are not sources of alpha, and secondly that FX rates......................

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