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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: John Pitera who wrote (7443)	11/3/2006 6:05:54 PM
From: John Pitera	Respond to of 33421

Low volatility spawns savvy FX management sector Friday, November 03, 2006 9:07:12 AM (GMT-06:00) Provided by: Reuters News By Veronica Brown LONDON, Nov 3 (Reuters) - Currency asset managers are getting creative, investing cash in more sophisticated ways as clients become adventurous in a tough trading environment. The specialist currency sector -- which involves separate management of foreign exchange in an international portfolio to limit currency losses and/or participate in gains -- has grown rapidly in recent years. Some estimates put its value at $200 billion by the end of last year. But managers have found that seeking outright profit -- or alpha -- in currency trading has proved increasingly tough with major currencies due to very low levels of volatility. Emerging market and commodity currencies are being sought increasingly due to the lack of opportunities offered on some majors. Implied volatilities -- a gauge of how sharply derivative traders and dealers expect currencies to move over a given period -- have been stuck near record low levels, leaving little room for currency managers to make money. "Volatility has been low. Currency markets have not been easy over the last couple of years and the reason for that is that we have not been in a trending environment," said Thanos Papasavvas, head of currency management at Investec Asset Management. He noted that euro/dollar <EUR=> had been stuck in a range since the dollar struck a record low at the end of 2004 at $1.3667. The dollar's drop during 2001-2004 against the pound and euro had alerted European investors to the dangers of unmanaged currency risk against a backdrop of lower equity returns and falling bond yields. "In a relatively trending period, it is easier for currency managers to add value because a number of different styles of managers will be able to capture that trend," Papasavvas said. EMERGING PROMISE Given the tougher backdrop on major currencies, managers say they have found substantial opportunities to generate alpha in the emerging market area. "By historical standards admittedly it's very low on the majors in terms of volatility, so we have been looking for undervalued currencies in the emerging market space," said Stephanie McClennon, portfolio manager at Avebury Asset Management. She said that commodity currencies in particular, including the South African rand, had provided opportunities in 2006. Investec's Papasavvas also said diversification into emerging market currencies had been a way of adding value, but said returns were also being generated from investment in higher yielding currencies. "In a period where the risk appetite is comfortable and the volatility is low, we have seen value with investment in slightly higher interest rate carry currencies," he said. "So we're biased towards sterling, New Zealand dollar, U.S. dollar, Australian versus lower yielders including the yen, the Swiss franc, the Norwegian crown," he added. Papasavvas urged caution in carry currencies, however, as a pick-up in volatility would see those trades reversed. Indeed, euro/dollar one-month volatility <EUR1MO=> started to pick up from record lows this week as spot hit five-week highs. COMFORTABLE WITH RISK A sign of confidence in the sector has been the willingness of clients to allow their funds to be invested in increasingly sophisticated ways, using different strategies and more risk. Nicholas Lyster, CEO of Principal Global Investors (Europe), said a number of clients, including larger pension funds awarding big mandates, are allocating money to different strategies including trend following and systematic -- using models. "We've always invested in emerging markets and whenever we've asked clients to add further emerging market currencies that hasn't been a problem at all," he said. "A couple of years ago some of our clients would purely want G10 and G8 -- and now pretty much all of them are saying we can invest pretty widely." Investec's Papasavvas said increased flexibility was also being seen in guidelines, allowing currency managers to operate in both an appreciating and depreciating environment. "Trustees have become more comfortable with the idea of currency management as an asset class," he said.