Asset managers who are focused on absolute returns when managing their currency risk tend to use strategies that are characterized by risk reduction, adopting a passive currency management approach in order to achieve this. By contrast, funds that are focused on relative returns tend to manage currency risk more actively. Their aim is after all to outperform an unhedged position, or in some cases the hedged benchmark, in other words to “add alpha”. In this, there is no “right” and “wrong”. It depends completely on the risk management style of the fund and what risk approach it takes towards both the underlying assets and also the embedded currency risk.
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RELATIVE RETURNS — ADDING ALPHA
July 4th, 2011ABSOLUTE RETURNS — RISK REDUCTION
July 1st, 2011Just as a corporation has to decide whether to run their Treasury operation as a profit or as a risk reduction centre, so a portfolio manager has to make the same kind of choice. While one can theoretically change one’s core approach to managing the portfolio at any time, it is usually better to make that choice right at the start. In the process, the portfolio manager should decide what style of portfolio management is to be adopted as regards the underlying investments, the desired return profile of the portfolio and also the style of currency management to be used. In the case of a portfolio manager who is focusing on absolute returns, the currency risk management style that is synonymous with this focuses on reducing the risk of the overall portfolio. This in turn usually means adopting a passive style of currency risk management.