A factor-based approach to currency management

Insight's approach to currency management

At Insight, we believe that investment returns can be generated via awareness of a number of persistent behavioural features that occur within currency markets. By utilising a systematic approach to capturing these behavioural features, we believe that it is possible to achieve reliable and repeatable returns over time. This approach can be utilised within either absolute return strategies, which aim to generate returns above the risk-free rate, or to enhance the returns of hedging strategies.

Our investment process can be broken down into three key features:

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Identify appropriate currency pairs   Risk management and risk control   Tailored portfolio implementation
From the liquid and diverse universe that makes up our currency opportunity set, we identify the most appropriate currency pairs that capture the behavioural factors we are targeting at a given point in time. These could be either return seeking, or have structural diversification benefits relative to other factors we are targeting.   From this pool of currency pairs, we create an appropriately risk-adjusted basket of currencies. We then scale exposures upwards or downwards, depending on the market environment to meet the aggregate portfolio risk target.   We tailor solutions for our clients in a way that satisfies their objectives and meets their performance and risk targets. We back this up by continuous monitoring and research to enhance our ability to capture behavioural factors.
   


In this paper we explain:

  • how we define our opportunity set
  • the factors we use in our factor-based modelling
  • how we manage risk

 

 

Important Information

Performance data refers to simulated past performance, and may not be a reliable indicator of future performance. Investment in any strategy involves a risk of loss which may partly be due to exchange rate fluctuations.

The performance results shown, whether net or gross of investment management fees, reflect the reinvestment of dividends and/or income and other earnings. Any gross of fees performance does not include fees and charges and these can have a material detrimental effect on the performance of an investment.

Any target performance aims are not a guarantee, may not be achieved and a capital loss may occur. Strategies which have a higher performance aim generally take more risk to achieve this and so have a greater potential for the returns to be significantly different than expected.

Portfolio holdings are subject to change, for information only and are not investment recommendations.

Currency risk management

Currency hedging techniques aim to eliminate the effects of changes in the exchange rate between the currency of the underlying investments and the base currency (i.e. the reporting currency) of the portfolio. These techniques may not eliminate all the currency risk.

Derivatives may be used to generate returns as well as to reduce costs and/or the overall risk of the portfolio. Using derivatives can involve a higher level of risk. A small movement in the price of an underlying investment may result in a disproportionately large movement in the price of the derivative investment.

Investments in emerging markets can be less liquid and riskier than more developed markets and difficulties in accounting, dealing, settlement and custody may arise.

Where leverage is used through the use of swaps and other derivative instruments, this can increase the overall volatility. Any event that adversely affects the value of an investment would be magnified if leverage is employed by the portfolio and losses would be greater than if leverage were not employed.

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