Investors with international exposure seem to be divided between two camps. Two conversations with clients yesterday highlighted the polarity perfectly. The first client, representative of the vast majority of institutional assets, believed currency markets are random and possess no underlying structure. They have a policy of not hedging any currency exposure, believing that by leaving their exposures unmanaged they were not taking any active decisions on currency at all.  The second client took a very different approach, adopting a strategy to exploit well-known currency market anomalies – trends, carry, parity relationships et al.


Both clients recognized that the decision to invest in foreign denominated assets was effectively two decisions. The first decision was the choice of underlying asset. The second decision was the currency decision.  Leaving FX exposure unmanaged is effectively an active decision on the domestic currency.  The active currency approach of the second manager mistook their portfolio currency exposure for the neutral currency exposure, failing to realize it was driven by their underlying asset allocation.


We have identified strong empirical evidence that there is an underlying long-term structure to currency markets. The theoretical assumptions underpinning it were clarified by the work of Belgian economist Robert Triffin, and referenced in an op-ed by Lorenzo Bini-Smaghi for the FT yesterday (


With the technology at our disposal today, and packaged in a very simple, easy to use format, it is easier and cheaper than ever to put in place effective and appropriate currency management strategies.