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Historically, managers of currency funds have earned excess returns, according to an article (PDF) published in the September/October CFA Institute Financial Analysts Journal. However, upon further analysis, researchers find alpha would be positive only prior to fees and costs.
Co-authors Momtchil Pojarliev, CFA, and Richard M. Levich found that the average excess return of the funds in the Barclay Currency Traders Index (BCTI) was positive at 25 basis points per month from 1990-2006.
The authors further examined the factors that impact an index of currency-trading returns and the returns for individual currency managers. They found that these returns can be explained by four factors, each of which represents a distinct style of currency investing: carry trading, trend following, value trading, and currency volatility.
“Once we accounted for the four systematic beta factors, however, the alpha became negative (-9 basis points per month) and not statistically different from zero,” the authors wrote. “Considering that our sample returns are net of management fees, which are typically two percent per year (or about 16 basis points per month) plus a share of profits, our estimated alpha would be positive only prior to management fees and transaction costs. This finding is not encouraging news for currency managers.”
Pojarliev is head of currencies at Hermes Investment Management Limited in London, and Levich is a professor of finance and international...................... To view our full article Click here
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