Currency Investor Magazine Autumn 2010

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Currency management comes naturally to usWith over 30 years experience in active currency management, a multi-strategy approach and access to a universe of over 50 currencies, we offer a broad range of currency solutions designed to complement an investment portfolio. For more information call +44 (0)20 7497 1900 or visit www.investecassetmanagement.com

Telephone calls may be recorded for training and quality assurance purposes. Issued by Investec Asset Management, October 2010.

AUTUMN 2010his edition of Currency Investor comes out following the publication of the Triennial Survey of the Foreign Exchange and Derivatives Market, from the Bank for International Settlements (BIS). Rather than bringing forth a yawn from the investment community, its report provides useful ammunition for managers in their battle to demonstrate that currencies are an investable asset class. The liquidity of the market and opportunities for currency investment over the last 3 years have stood the test of (theoretically) the worst economic crisis since the 1930s. An analysis of the BIS report by Record Currency Management for this issue, highlights the healthy growth of spot and forwards trading, hand-in hand with a fall in the trading of options and swaps hardly surprising considering the panic at the time of the nancial crisis about counter-party risk following the failure of Lehman Brothers. Probably the most obvious conclusion that can be drawn from the report is the gradual and increasing importance of emerging markets, but Asia in particular. The gures show not only rising levels of cross-border transactions, but also that the Yen is still seen as the safe currency, that Singapore has pushed Switzerland out to become the fourth biggest currency trading centre and the Australian dollar has overtaken the Swiss franc as one of the globes most traded currencies. We intend to run a regular Regional Report feature in this magazine focusing on Currency Management and Investment activities within specic global hotspots. We start in this edition with an in-depth overview of how the Asian markets are currently structured and the opportunities and dangers that race around this diverse region. Seppo Leskinen of SEB warns that while current account surpluses continue and investment ows into the region, the risk of intervention remains. And, it seems, absolute currency return strategies are currently out of favour there. Finally, many thanks for the kind words sent by industry doyens after our rst edition of Currency Investor. We are always open to hearing opinions, new ideas and suggestions about how we can improve our coverage of this exciting, dynamic and fast changing industry. Gerry OKane Editor

T

Gerry OKane

Gerry.Okane@currencyinvestor.net Editor

Helen Rochford

Helen.Rochford@currencyinvestor.net Production Manager

Charles Jago

Charles.Jago@currencyinvestor.net Publisher

Michael Best

Michael.Best@currencyinvestor.net Subscriptions Manager

Susan Rennie

Susie.Rennie@currencyinvestor.net Editorial Director

David Fielder

David.Fielder@currencyinvestor.net Features Manager

Charles Harris

Charles.Harris@currencyinvestor.net Advertising Manager

Simon Moss

Simon.Moss@currencyinvestor.net Commercial Manager

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Design and Origination:

Phill Zillwood Design Works Phill.design@btconnect.com Printed in the UK by Imagery UK Currency Investor (ISSN 1747-4051) is published quarterly www.currency-investor.net

Subscriptions Disclaimer

Please call our subscriptions hotline for further details: +44 (0) 1208 821 801 or email subs@currency-investor.net ASP Media Ltd and its respective ofcers, directors and employees does not recommend, or endorse any of the securities, commodities or investments appearing in this magazine. The views expressed in Currency Investor magazine are not necessarily those of ASP Media Ltd, which is not a nancial advisor and does not give investment advice. ASP Media Ltd is not an investment management company, a licensed nancial advisor, registered investment adviser or registered broker-dealer and does not provide investment or nancial advice or make investment recommendations. Although every effort has been made to ensure the accuracy of the information contained in this publication, the publishers can accept no liabilities for inaccuracies that may appear. Readers are advised to consult a professional investment advisor before undertaking any investment activities associated with currencies. The entire contents of Currency Investor are protected by copyright and all rights are reserved.

DIANA PLES and BHAVESH TRIVEDI Leader Currencies - still most tradable asset class

DR. MOMTCHIL POJARLIEV Dening Alpha in Currency Management

ARNAUD GERARD Currency Management Alternative approaches

JOHN MCCANN Fund Operations Letting an Administrator take the strain

FELIX SHIPKEVITCH Regulatory Roundup Regulatory reports from selected markets

THANOS PAPASAVVAS CI Interview

PHILIP POOLE Viewpoint Currency wars and emerging ination risks

16 11 20

The New Normal Dening Alpha in Currency ManagementMAGNUS PRIM and SEPPO LESKINEN Regional Report Asia - a market that cant be ignored AXEL MERK Listed Currency Vehicles TIM MAXWELL FX Managed Accounts Achieving realistically sustainable returns

COMPANIES IN THIS ISSUECurrencies Still the most liquid and tradable asset marketA A.G.Bisset & Co Alpha Financial Technologies page 45 page 4 page 11 page 9 page 4 page 7 page 45 page 75 page 9 page 71 page 46 Merk Investments Morgan Stanley N Nomura Nykredit Asset Management O Overlay Asset Management P Pareto Investment Management Parker Blacktree PIMCO Principal Global Investors Q QP Capital LLC Quaesta Capital R Record Currency Management Rhicon Currency Management S SEB State Street Global Markets Swing Capital T TD Ameritrade The Shipkevich Law Firm Threadneedle Towers Watson Trinity Fund Administration U UBS Investment Bank W Windham Capital Management WisdomTree page 64 page 5 page 8 page 6 page 4 page 7 page 80 page 19 page 6 page 72 page 46 page 11 page 20 page 56 Outside Back Cover page 19 page 10 page 34 page 6 page 45 page 30 Inside Back Cover page 5 page 4

Timing How important is it for achieving Currency Alpha?

FX Managed Accounts Achieving realistically sustainable returns

72

B Bank For International Settlements Baring Asset Management BNP Paribas BNY Mellon C Campbell & Company D Deutsche Bank DTCC E ETF Securities F First Quadrant H Hathersage Capital Management HSBC Global Asset Management I Investec Asset Management ISDA J JP Morgan John Hancock Funds JSE L London Stock Exchange M Macro Currency Group

Regional Report Asia - a market that cant be ignred

56

page 16 page 52 Inside Front Cover page 51 page 40 page 10 page 10

page 5 page 6

02 Currency Investor | Autumn 2010

Autumn 2010 ContentsLEADER11. Currencies still the most liquid and tradable asset market in the worldDiana Ples and Bhavesh Trivedi examine the results of the recent BIS Triennial survey into FX turnover which conrmed that volumes traded daily on the foreign exchange market are now past the $4 trillion mark.

INVESTOR PERSPECTIVES

44. From strategies to style buckets: searching for weakness in the investment processGerry OKane sets out to help investors in the currency sector discover more about the strategies available in the marketplace and their relative strengths and weaknesses.

16. The New Normal - dening alpha in Currency ManagementThe recession caused by the nancial crisis ofcially ended in June 2009 but the global economic outlook is still uncertain. PIMCO calls this new world the New Normal and Dr. Momtchil Pojarliev outlines what this could all mean for Institutional Investors.

CURRENCY MANAGEMENT

52. Viewpoint: Currency wars and emerging ination risks

Some commentators believe that the world is in the middle of a currency war. Philip Poole looks at the reasons behind this and the possible implications for investors as appreciation pressures continue to build up with many Emerging Market currencies.

REGIONAL REPORT

20. Timing: - just how important is it for achieving currency alpha?Gerry OKane interviews a selection of leading currency managers to gather their views on the importance of timing the market as a means of seeking alpha.

56. Currency investment in Asia a market that cant be ignoredSeppo Leskinen and Magnus Prim prole the range of positive factors that continue to attract capital inows into Asia and examine the potential for future growth in the currency investment business within the region.

26. Alternative approaches to Currency ManagementInternational investors hold two types of currency risk and confusion between these different types of risk can result in signicant currency losses. With this in mind Arnaud Gerard examines the normal method of controlling currency translation risk and highlights the challenges and weakness of dening a xed benchmark.

INVESTMENT PRODUCTS

64. Listed currency vehicles helping investors to make the right choicesAxel Merk highlights the many new currency mutual funds, currency ETFs and currency ETNs that have recently been launched and why investors should take time to understand the differences between them.

FUND OPERATIONS

30. Currency Fund Operations Why not let an administrator take the strain?John McCann discusses the process of fund administration and the