Currency Alpha Program

Unique Features

A Currency Alpha Program has unique features that institutional investors can tap to boost an investment portfolio’s total return.

One important feature is the portability of the alpha. It is not necessary to have pre-existing currency exposures to benefit from currency returns. A currency program can be placed like a currency overlay program on any asset or it can be added as a separate investment to a portfolio.

A second feature is the ability to initiate a currency program without any investment. To buy and sell currency forward contracts does not require an investment - only the establishment of currency trading lines. The return of a Currency Alpha Program can therefore be added on top of to that of any other investment return to boost a portfolio’s total return.

An investor must normally sell a portion of its equity or fixed income assets to invest in another asset class. If the aim is to increase a portfolio’s total return, the expected return of the alternative asset must be higher than the return from equities, fixed income, or cash to make the alternative investment attractive.

Since a Currency Alpha Program does not require the sale of any other assets, the currency return can be lower than that from equities, fixed income, or cash and still boost the total return of a portfolio. The currency return is simply added on top of those returns.

In an environment in which the expected return of fixed income assets is are significantly lower than in the 1990s, investors must find asset classes that can boost a portfolio’s total return to meet total return targets. A currency alpha program can provide that needed return.

Currency Overlay Managers Offer a Valuable Skill

Studies by pension fund consultants like Russell/Mellon Company, Watson Wyatt, and Mercer, have demonstrated that currency overlay managers add value managing currency exposures. This skill can be employed to buy and sell currencies to make a profit – to generate alpha.

Currencies are liquid and have very low transaction costs. Currency managers can therefore exploit price-trends in the $1.9 trillion-a-day currency market to generate returns.

Bisset’s Currency Alpha Program

A.G. Bisset & Company’s Currency Alpha Program is based on its currency model. It has a real-time performance record that spanned twenty years in July 2003. The model has been applied to manage currency overlay programs for institutions and pension funds in the United States and Europe since 1988.

In portfolios with cross-border investments, the currency exposures are pre-determined by those investments and are controlled by a portfolio’s equity and/or fixed income managers. As a result, a currency overlay manager can only place and lift hedges on those currencies and in the pre-determined proportions. However, the decisions to place and lift hedges can be applied independently of any pre-existing currency exposure. Working without constraints A.G. Bisset is free to decide how much to buy and sell of each currency.

Bisset’s currency model drives all hedging decisions in Bisset’s overlay programs. A historical record can therefore be created to demonstrate what the alpha return would have been had the model’s signals been applied systematically to buy and sell currencies in an unconstrained environment.

Creating Currency Portfolios

Bisset’s currency model performs successfully because it identifies price-trends that average two to four months. The model issues signals to buy, sell or take a neutral position when price-trends unfold in each currency included in the Currency Alpha Program.

The Currency Alpha Program holds portfolios of long and short positions in the dollar, the Japanese yen and the British pound sterling against the euro. The currency model will take a long position in a currency (buy it) when the model is bullish. It will sell a currency short when it is bearish, and it will have no position in a currency when the model is neutral.

The size of each long or short position is determined by a matrix in which the signals in the dollar, the yen and sterling against the euro are weighted by the signals that are given in the cross-rates of those currencies.

The use of a matrix ensures that the program will hold the largest long position in the strongest currency and the largest short position in the weakest currency. Because positions are driven by price-trends and their relative strength Bisset’s Currency Alpha Program is not dependent on the correlation between currencies, which often change over time.

Top of Page | Contact Us for More Information