Most institutional clients using active currency overlay specialists for multi-regional portfolios have had positive returns, according to a report by consultant Frank Russell.
Eighteen managers provided sufficient data for an analysis of 241 accounts covering 13 currencies. Three quarters of the accounts recorded positive returns, while 81% over the past three and five years added value. US dollar accounts were most successful with over 82% adding value. The report puts this down to the dollar’s appreciation over the period.
Average excess return of the accounts was 1.06% a year with an average tracking error of 2.25%. As of June 1999, those with a minimum of three years’ data produced 1.17% excess return a year and those with more than five years’ data averaged 1.39%.
The report says excess returns from currency overlay are sustainable and transformable across various base currencies and hedge ratios. While the potential for excess return is attractive, the report warns investors that the logistics of implementing currency overlay can be considerable and that those considering an overlay strategy need to understand its complexities.

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