Traditional bond managers and pension funds are increasing their activity in the foreign exchange markets to beef up returns amid tight spreads.
Currency players say funds are giving them more latitude in their investing styles as the ubiquitous search for yield is driving new demand for fx-focused investments. This is largely because investor mentality has changed from viewing currency plays as a hedge to now as a return generator, Dan Szor, managing director at FX Concepts, which manages fixed income mandates for institutional investors. He said on average over the last five years, three of the top 10 global fixed-income managers actively managing against the Lehman Brothers Global Aggregate Bond Index have outperformed the index by 50-150 basis points, while a currency portfolio with a similar risk profile would have beaten the index by 300bps.
Andrew Dales, director of currency research and strategy at Barclays Global Investors, agreed there has been a shift in how investors use fx exposure and said he is placing more long and short positions than in the past and is investing in a wider range of currencies. The increased flexibility is reducing the role of the dollar and Treasuries in FX portfolios, said investors.
