Pensions Extend Search for Returns Boosters to Currency Markets

This interest in currency trades – among fund managers used to focusing primarily on the fixed income and equity markets – reflects how an aging population and ballooning health-care costs are pressuring fund managers to come up with new return-boosting strategies, according to a Wall Street Journal report.

On the plus side of this investment approach, funds don’t need to raise large amounts of money since currency wagers are made with derivatives – financial contracts whose value is based on the performance of an underlying asset, the Journal said. Also, currency movements also have low correlations with other markets, helping to reduce a portfolio’s overall risk.

Meanwhile, returns also have been solid. Parker Global Securities’ Parker FX Index, which measures the performance of 61 currency managers worldwide, has a compound annual return of 11.7% over the past 19 years, though returns slipped into negative territory last year, according to the Stamford, Connecticut consultants.

But dealings in the currency markets also come with their share of risks, according to the Journal report. First, information-gathering and due diligence reviews are tougher for plan sponsors since far fewer currency managers exist than stock-fund and bond-fund managers. The currency managers tend to have shorter track records and more complex trading strategies than most stock and bond managers. Also, the more aggressive currency managers get the same hefty fees charged by hedge-fund managers: 20% of the profits on top of a 1% to 2% management charge.

Finally, while currency cycles tend to last several years, having the market swing the other way can make trouble for those with currency positions. Even though most analysts believe the dollar is still in a long-term bear market, its surprise rally so far this year has caused pain to those who bet against the US currency.

As an example of a major pension fund player involved in the trend, the California Public Employees’ Retirement System (CalPERS) is active in the currency market (See   Dollar Bill? ). Earlier this month, the largest US public pension fund got the nod from its board to take a larger and more aggressive currency market position.

Even with the new pension fund interest, compared with stock and bond investing, currency management is in its infancy, the Journal said. “It’s a much smaller universe of managers,” Bob Gish, director of investments for the New Mexico Public Employees Retirement Association, told the Journal. “There’s only a couple of dozen that I’m aware of.”

Gish is in the process of hiring a firm to manage currency.