Handbook of Exchange Rates

22.4 Conclusion

There is growing interest in FX as an asset class. Even though the allocation to FX still remains low compared to the allocations to more traditional assets, there is evidence that FX is increasingly in demand. Part of this demand is driven by the recent disappointing performance of equities. Currency investments are not exposed to the same risk factors as equities and bonds, and hence they do not exhibit a high correlation to traditional assets. Furthermore, there are well-documented anomalies that exist in the FX market. Since the majority of the players in the FX market are not profit focused, these inefficiencies continue to be exploited and still exist.

Strategy-based indices and products give investors easy access to FX as an asset class. These indices provide exposure to multistrategy portfolios with a relatively low cost. From retail to institutional, investors can now gain the same attractive returns enjoyed by FX specialists. While the initial beta type FX strategy indices and products were created for benchmarking purposes and only to give exposure to simple FX styles, the later alpha versions are more sophisticated. These indices replicate investment strategies that would have been in the past only accessible via investments in hedge funds. We can expect FX indices and products to evolve and expand to cater for the growing investor demand.

¹See Triennial Central Bank Survey Report on Global Foreign Exchange Market Activity in 2010.