Hunting for Alpha Hunters in the Currency Jungle

Abstract

When equity markets are churning out double digit returns and fixed income markets offer normal yields or declining rates, institutional investors can be somewhat relaxed. They can earn reasonable absolute returns with conventional strategies. “Beta grazing” goes a long way without much need to look for exotica.1 Put differently, when traditional assets are likely to provide reasonable returns, the need for so called alternatives is less urgent. But when expected returns in equity markets seem slight and fixed income has been overrun by scared rabbits looking for safety or a small yield-to-maturity, things are different. What should institutional investors do to satisfy their need for more acceptable absolute rates of return?2 In such an environment, the marginal contribution of alpha hunting is far greater. It goes beyond the desire to diversity into the necessity to earn a critical level of absolute return.