Can global bond fund managers generate alpha using currency volatility?

Abstract

The management of global bond funds, and in particular their exposure to currency volatility, which deals with the complexity of both currency and fixed-income markets, is the main focus of this paper. Since bond managers are concerned with the management of both interest and currency risk, the analysis is focused on beta exposure, and in particular on currency volatility. Using quantitative models and derivative instruments, e.g., currency straddles, the results of the study point out that currency volatility management always matters in terms of exploiting inefficiencies in the currency markets, thus generating performance and successfully dealing with the complexity of both asset classes, which are integrated in global bond funds. Thus, global fixed-income managers are given an additional source of alpha return.