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Everyone seems to be making the decision to seek alpha in foreign exchange, but what does that entail? Leading figures in the FX market debate how to combine systematic and discretionary risk allocation, the importance of choosing the right managers, understanding volatility and whether or not the sell side has helped the transition to alpha
Roundtable participants
JT, ClientKnowledge From the various sources of data available, we estimate that the overall market in foreign exchange is now about $2 trillion a day of activity, and of that approximately $500 billion a day is alpha-seeking. By alpha-seeking, we mean activity dedicated purely to seeking foreign exchange returns, whether it's undertaken by hedge funds, by traditional money managers, as a pure asset class, or by sell-side prop desks unrelated to underlying client activity. Harriett, is there a clear distinction between currency overlay and alpha-seeking strategies at JP Morgan Fleming?
HB, JPMAM Our currency overlay business began in the 1980s and was linked to the assets that existed in the underlying portfolio. Clients wanted those specific exposures managed. Over the years, they asked us to start broadening exposure across a wider range of currencies, even though they didn't have those currencies in their portfolios. That became what I would now call a long/short currency approach. By the end of the 1990s, more and more clients were thinking of separating currency beta -- the strategic hedge -- from currency alpha. This should be much more effectively delivered without the kind of constraints that exist when FX is linked directly to the assets. I would estimate that 75% of our clients have now changed to less constrained mandates, whereas 25% are probably still keen to have that link between their portfolio and the long and short positions that they can take. In five years' time everyone will have de-linked.
AE, MGI I agree. The vast majority are alpha-seeking to some extent. It's a gradual crossover, as clients are aware of the risks that pure currency trading entails and therefore they still impose a lot of constraints. I think it's going to take five to 10 years to get there, but it's certainly moving in the direction of pure alpha strategies.
PP, DynexCorp We have demonstrated to clients seeking portfolio overlay...