Chaotic movements interspersed with severe slides

Currencies are progressing by stairs but down by the lift. "This saying of the foreign exchange market is confirmed last year, and still today to some extent. In 2008, the currencies have indeed rediscovered the joys and the trials and tribulations of a volatility out of standards, which fell from its level prevailing before the bankruptcy of Lehman Brothers. That of the g-7 countries and was almost multiplied by 3 or 4 the past year. Chaotic movements interspersed with severe slides. During the month of December alone, the pound sterling fell for example more than 20 against the euro.

As asset class, currency remain still little represented in portfolios of institutional on both sides of the Atlantic. Thus, 5 of the French pension funds are place on average 5 of their outstanding, according to the latest survey of Mercer conducted in 2008, while only 1 in the rest of Europe would be left trying to. In France, just make it a source of autonomous performance, independently with the shares, obligations... This is the cover of their portfolio (shares, bonds) foreign exchange risk which is the priority. It is also often provided by the Manager of the Fund, as joint service, while others the outsource to a specialist of the currencies. Such expertise, coverage or research performance, are covered primarily by the Anglo-Saxon actors (funds, hedge funds...): Record Currency Management, Pareto (Group BNY Mellon), Mesirow Financial Management, Hathersage, First Quadrant, capital Genoa Currency or FX Concepts.

"Free lunch".

In the current context still marked by suspicion and the fears of investors, the currency in any case have some advantages, that does not lack noted proponents. They are transparent assets, without unpleasant surprises hidden and liquid in any case for the major currencies of the G7, the Exchange is the largest and most active of the planet (see illustration). This is however not as long as all the strategies are perfectly clear and understandable by clients. Still less that they are safe as testified the woes of the "carry trade", which attracted many players for performance in theory "easy", and have paid this illusion (read more low "Requiem for the"carry trade""). Still less on the Exchange on the other hand there is "free lunch". In 2008, Parker index, which aggregates the performance of a set of managers operating on currencies (72 programmes implemented by some 60 actors), increased by 4.9. Systematic managers (who use exclusively models) have been raking a gain of 4.2, for a performance of 6.05 percent discretionary operators (which based their decisions on their own judgement). The performance significant, but half lower earnings, 10, they have won during their golden age between 1987 and 1997.

Modest performance

Currencies remain a challenge for even the most experienced managers. On a very short term horizon (a few days) no model can indeed predict the evolution of the currencies, which follow a random walk (launched dice... series). Where the use of important analysis technique, very popular on this type of market, as shown (box read) studies. Medium and long term, different strategies to obtain results. Examples Bet on the return of the currencies to their level as established by the theory of purchasing power parity, capture (followed by trend) market movements... Approaches, including the interest varies depending on market conditions. "Contrary to the assumptions wishing that the underperformance of the subpolicy of trend tracking is the main reason for the overall disappointing performance of the managers on the currency between April 2005 and March 2008, we have shown that they are more attributable to managers who had bet too early on the failure and the unwinding of the operations of"carry trade", which experienced very high yields until the summer 2007.specify Momtchil Hermes Invesment Management Pojarliev and Richard M. Levich from the Stern School of Business of the University of New York (1). The researchers based their work on the study of nearly 80 present managers on the platform FXSelect of Deutsche Bank. They conclude that there is overall not persistence of the "alpha" of these professionals, an objective measure of their talent. In other words, a performance manager a year is not more likely to be the next year. Moreover, over a period of three years, none of them is able to generate a "alpha" significant positive.

Common risk factors

Results in line with previous work that illustrate the difficulties of obtaining good yields of recurring on the foreign exchange market. Those who are better left rather attempted to capture trends as the "dead" are made, they trap by the ups and downs of the volatility.

In this regard, the movement of the different currencies are not autonomous and do not respond to their specific risk. Some groups of currencies share common developments. Example The movements of the currencies of the developed countries of OECD to the dollar. "The first common risk factor (50 of the variance in the medium and long term, and up to 70 recently) reflects the fact that these currencies tend to evolve all at the same time and in the same direction to the greenback." The example tends to appreciate uniformly against all other currencies developed OECD an increase of risk aversion. The second (20 of the variance) illustrates the fact that the European currencies (euro, Swiss franc, Norwegian krone,...) on the one hand and currencies raw block dollar (Australian, New Zealand and Canadian dollars) tend to have similar behaviors from each other. "In total, in the medium term, only 30 of the movements of the currencies can be characterized as currency-specific", emphasize Luc Dumontier Deputy Director and Salim Louzgani financial engineer at Sinopia (HSBC Global Asset Management).