Is active currency management effective for international equity portfolios involving managed futures and hedge funds?

Abstract

We assessed the potential benefit of using active currency management on international equity portfolio investment from Japan, British, Switzerland and the euro-regions that include bonds, managed futures and hedge funds assets in their respective international equity portfolios. Initially, these are US dollar-based portfolios. Our empirical studies using data from 2001 to 2006 show that active currency management converts US dollar back to Japanese yen better, and produce better average annual returns for the JPY portfolio. However, active currency management does not work well for the other European currency-based portfolios. It seems that using currency conversion by forward contract generates better local average annual portfolio returns for these other European portfolios. Regarding the effectiveness of including alternative investments and bond assets within the international equity portfolios, hedge funds appear to generate better average annual portfolio returns, followed by managed futures and then the bond index. We also observed using forward contracts on international equity portfolio included with hedge funds produce the best maximum annual returns.