Practical Active Currency Management for Global Equity Portfolios

Abstract

For global equity portfolios, a number of active currency management strategies have consistently dominated both unhedged and passively hedged strategies. The author shows that for portfolios broadly diversified across major equity markets (including the U.S., the U.K., France, Germany, and Japan), a single technically based active currency management strategy yielded the highest risk–adjusted return in all rolling ten–year periods and in twenty–one of twenty–four rolling five–year periods during 1972–1999. Although equity managers may not be in the business of foreign exchange management, they should not be blind to significant currency trends that could be detrimental to portfolio performance. The author suggests some practical techniques to address these trends.