, and determine a policy, based onthese studies, that matches their goals. It is not uncommon for investors to choose an arbitrarybenchmark hedge ratio (say 50%) without a full assessment of the implications on the portfolio.While this may appear a little crude, nevertheless it can result in beneﬁcial action where a fulleranalysis and more study would result in paralysis and inaction.Active or passive? Once an investor has chosen a strategic position which requires overlay,then he has to decide whether to implement it with an active overlay or a passive overlay. Thedecision will be determined by two factors. The ﬁrst (and overriding) is whether the investor
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believes that active currency management can add value. He clearly also needs to believe thathe (together with his consultant if he uses one) is capable of choosing an active manager thatwill add value in the future. In currency overlay this may in practice be much easier than inother active manager searches: as one consultant put it, ‘it is quite hard to ﬁnd an establishedcurrency manager who does not add value over time’.The second factor is whether the investor has a desire for an asymmetrical overlay returnpattern. Irrespective of their beliefs about long-term value added, many investors are attractedto the idea of limited negative performance (and unlimited positive performance) of any overlay. Asymmetrical return is also associated with asymmetrical cash ﬂows, so the amount ofcash outﬂow in periods of domestic currency weakness is limited to a predetermined amountrather than dependent on currency movements alone. These asymmetric active mandates are acharacteristic of dynamic and option-based styles in particular.Finally, investors may choose to implement a risk-reducing overlay without adopting ahedged benchmark. While this creates a wide tracking error, it does have the merit of anunderstandable benchmark in which ‘cash-in’ from the overlay means positive performanceversus the benchmark, and the positive performance is associated with negative performance ofthe unhedged international assets. It would be highly unusual, and hard to justify, the adoptionof a passive overlay programme with an unhedged benchmark.(2) Value-added: With the increasing length of track records possessed by the main currencyoverlay ﬁrms, most investment consultants and many investors now accept that active currencyoverlay is capable of generating positive excess returns over long periods of time. As discussedelsewhere in the book (Chapter 4, Chapter 9) this is not the result of chance, nor an unfathomable‘mystery’. The structural conditions that allow currency market inefﬁciencies to persist alsoallow the median currency overlay manager to make money.The design of a pure ‘value-added’ (or ‘alpha’) active currency portfolio is different froma risk-reducing currency overlay, although strictly speaking it is still an overlay since it doesnot require a capital allocation. The key criteria for a successful ‘alpha’ mandate are: (a) widelatitude given to the manager for cross-hedging and ‘net-short’ positions (i.e. able to exploitany directional movement in any major currency pair); (b) a clear and unambiguous benchmark(zero return is as good as any); (c) a clear expression of the nominal amount of the mandate;and (d) a tracking-error target or limit built into the investment guidelines (see below andAppendix 4).Where the investor has both strategic risk reduction and active value added as goals, thenthese two, sometimes conﬂicting designs, have to be knitted together.12.1.2 For risk-reducing overlay – benchmark hedge ratioThe benchmark hedge ratio is, as already discussed (and illustrated) elsewhere in the book(particularly Chapter 6 and Chapter 8), a technically complex area, with some differing academic views, although the views amongst most expert practitioners and consultants are broadlysimilar, and expressed in this book.A purist approach is to ﬁrst choose passive or active overlay based on the investor’s beliefsabout the continuing ability of currency managers to add value. Then, with that choice inhand, to optimise the allocation of international assets (usually equities in this context) with anadditional overlay asset class, as described on p. 134. The optimised portfolio then becomesthe strategic asset allocation, and the scale of the active overlay as a percentage of internationalassets becomes the strategic (benchmark) hedge ratio. Using the values from Table 5.6 (which
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allows active currency overlay), this would mean a 100% benchmark hedge ratio for all portfolios apart from the most risk-loving – the 15% whole-portfolio volatility target – which wouldhave an 82% benchmark hedge ratio. If passive overlay is the chosen route, then similarly allportfolios apart from the most risk-loving would have a 100% hedged benchmark. However,without active overlay’s value added to maintain its appeal to the optimiser, the removal of therisk constraint sends the benchmark hedge ratio near to zero. However, this purist approachis just that, and I have yet to come across such thorough-going purism in any strategic assetallocation decision.An analytical but realistic approach is to conduct this and other analyses, and then reacha common-sense compromise asset allocation. Most large investors (pension funds, endowments) still favour home bias even though there is no theoretical support for it. They willoften measure nominal volatility rather than volatility relative to long-bond returns (reﬂectingtheir liabilities), and they will often declare support for one particular asset class over anotherwithout a clear description of why they hold that belief. Under these circumstances, a recognition that unmanaged currency exposure gives risk without return will lead such an investorto choose a fully or partially hedged benchmark. This is likely to lead to a benchmark hedgeratio between 50% and 100%, and the ﬁnal part of the decision will probably depend on themateriality of the international exposure, the maturity of the fund and (for a pension fund) thestrength of the sponsoring parent relative to the fund’s liabilities.An intuitive approach would be to accept that currency hedging reduces risk, and thereforethat any hedging has merit. Without any further analysis the intuitive investor may wish tominimise the regret from hedging,1 and this will lead to a 50% hedged benchmark. It alsoprovides a symmetrical platform for any active currency overlay that does not allow crosshedging or net-short positions.Finally, many investors are sensitive to the cash ﬂows that arise from currency overlay. Thedetailed analysis of the costs of managing cash ﬂows in Chapter 6 shows that this sensitivitymay not be justiﬁed, but nevertheless it exists. High benchmark hedge ratios naturally leadto high potential cash ﬂows from overlay. This may lead some investors to choose lowerbenchmark hedge ratios than pure risk-reduction considerations would imply, and sometimesunhedged benchmarks (although only for active overlay).12.1.3 Investment guidelines – activeI have included sample investment guidelines in Appendix 4. The key considerations for anactive mandate are the scale, the benchmark (discussed above), the restrictions and the targets.The scale is largely self-explanatory, for risk-reducing currency overlay it is normallythe marked-to-market valuation of the international assets to be overlaid. It may excludeunhedgeable currencies, although this is usually marginal.Under restrictions come the permitted hedge ratio range (0–100%, 25–75%, 50-150%, etc.),whether cross hedging is permitted (i.e. active positions in currency pairs which exclude theinvestor’s base currency, and possibly the target currencies), and if cross hedging is permitted,the range, and scale, of currencies that can be traded. Some mandates may have a restriction(i.e. an absolute limit) on downside performance, or on negative cash ﬂows, although this canhave the effect of limiting the expected value added of the mandate. Well-designed investment1See Gardner, G.W. and Wuilloud, T., The Regret Syndrome in Currency Risk Management: A Closer Look, Russell ResearchCommentaries, August 1994.
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guidelines give clear instructions in the event of breaches of restrictions, with timetables andconsequences.Finally, targets are the key measures on which the success or otherwise of the mandate will bejudged. These are typically the tracking error of the actual performance versus the benchmarkperformance (see Section 7.6), and the average annual excess return (or value added) versusthe benchmark. Some investment guidelines can have more complicated targets (‘capture 75%of the increase in value of currencies and limit the losses to 50% of their fall in value’), andthe test of these guidelines is how easy they are to monitor and give an unambiguous ‘yes’ or‘no’ to the question of whether they have been hit or not. In my experience, typical targets foractive mandates with a 50% hedged benchmark might be ‘tracking error of 2.5% p.a. with a1% p.a. excess return’.12.1.4 Investment guidelines – passiveSimilar considerations apply to passive mandate investment guidelines as to active ones, butwith all the measures writ smaller. The restrictions are likely to be dominant in the operationof the mandate, and the targets should be set on the basis of the manager’s assessment of theimpact of the restrictions. Typical targets for a passive mandate with a 100% benchmark hedgeratio might be ‘tracking error of 25 bp p.a. with a –5 bp excess return’ if the benchmark iscostless (i.e. based on mid-prices), or ‘tracking error of 25 bp p.a. with a 5 bp excess return’if the benchmark is based on WM/Reuters left- and right-hand side prices.12.1.5 Investment guidelines – alphaInvestment guidelines for an ‘alpha’ mandate should be much simpler than for a risk-reducingmandate. Guidelines should still have the scale, benchmark, restrictions and targets mentionedabove, but they can all be virtually one-liners.Scale can be a nominal amount (preferably in the investor’s base currency) to represent thedenominator against which percentages are calculated. Because a currency alpha programmedoes not require an initial investment, a clear expression of the scale is important. The investment guidelines should make clear how the scale changes over time. Under conventionalgeometric linking of returns, the scale would reﬂect the cumulative returns since inception. Asan example, if the initial scale of an alpha mandate is $100m, then the scale of the mandateunder the given assumed monthly returns would be as in Table 12.1.Note that on p. 84 I explicitly state that monthly returns of overlay alone cannot properlybe geometrically linked without including the returns of a ‘carrier asset’. However, alpha isdifferent. The exercise we are conducting here is to express the returns of active currencymanagement with a consistent denominator so the returns can be represented as percentages.If the overlay manager is given these guidelines, then the manager can quite properly rebalancethe size of currency positions based on the returns of the currency alpha programme, ratherthan, in the case of currency overlay, based on the returns of unhedged international assets.Under these circumstances, geometrically linking alpha returns is legitimate.There is another perfectly acceptable approach to take on changes to the scale of the alphamandate, and that is to have no changes that are not explicit. This would mean that returns fromcurrency alpha would be ‘washed away’, and in the example above, the scale would remainconstant at $100m. This approach would mean that the overlay manager would not have toroutinely rebalance his alpha process. It would remain legitimate in principle to geometrically
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Table 12.1 Example of mandate size changes – initialmandate size ($m) = $100mMonth
Assumed monthly returns
Mandate value ($m)
0123456789101112
0.21%0.36%0.24%−1.72%1.17%1.23%0.49%−0.24%0.72%0.08%0.77%−0.26%
100.00100.21100.58100.8199.08100.25101.47101.97101.72102.46102.54103.33103.06
link the returns (for example for the purposes of analysis and comparison), but the resultingcompound returns would not reﬂect the live portfolio, which in effect would exhibit simplereturns.The most appropriate benchmark for mandates under guidelines similar to these shownabove is almost certainly zero. It has the powerful twin beneﬁts of simplicity and transparency.Restrictions on an alpha mandate may be necessary for legal or regulatory reasons (say nonet short positions versus the home currency, or limitations on the range of currencies traded).The guidelines will also have to express an annual tracking error, and this could be eitherframed under this section (implying an absolute tracking error limit), or under the ‘targets’section, implying no absolute limit. For maximum efﬁciency, the overlay manager wouldbe given no additional restrictions over those strictly necessary to fulﬁl legal and regulatoryobligations.The most obvious target for the alpha mandate is the annual return target. This has to beexpressed in the direct context of the tracking error – they are directly proportional.12.1.6 Bank FX linesWhatever the type of overlay, an overlay mandate will require the overlay client to have FXlines at a panel of banks. The client may have minimum requirements for credit ratings forthe banks, but subject to that restriction, the overlay manager would be expected to suggestthe panel based on the particular needs of the client, to negotiate lines between the clientand each bank, and to advise the client on the most effective documentation to secure theircontractual rights. Where possible, a client’s security is usually best served by entering intoIFEMA2 agreements with their counterparties. IFEMA provides a framework for netting (i.e.legally offsetting) matching pairs of forward contracts where one deal reverses the other, andall the other terms, except the contract rate, are the same. This is intended to avoid possible2IFEMA (International Foreign Exchange Master Agreement) is a standard set of terms agreed by the British Bankers Associationand the US-based Financial Markets Lawyers Group. It was ﬁrst issued in 1993, and substantially amended and extended in 1997. Itis widely accepted in the main foreign exchange centres as ‘standard terms’ governing foreign exchange contracts. A wider version(Foreign Exchange and Options Master Agreement (FEOMA)) covers OTC options as well as forwards.
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‘cherry picking’ of proﬁtable forward contracts by the receiver of one bankrupt contract party,and the repudiation of the loss-making ones.Except under unusual circumstances, a client can expect to be granted FX lines by bankswithout any requirement for an initial deposit or margin, and without any ‘variation margin’(see p. 49 for more on margins). This means that the client retains control over the timing ofcash payments and receipts from the settlement of forward FX contracts.12.1.7 Bank contract conﬁrmationThe manager and the chosen bank counterparties need to establish a fail-safe mechanism for theconﬁrmation of verbal forward contracts. There are now well-established electronic platforms(for example CMS (formerly FX Match)) which allow both parties to upload deal details intoan independent system, and which then provide exception reports where details do not match.The client does not have to be involved in this process, but they need the conﬁdence that itis effective – forward contracts differ from conventional asset purchases in that they are notsettled immediately – and of course the delay is the length of the forward contract. Since thisis routinely several months, and can be up to 12 months, early and reliable conﬁrmation is ata much greater premium than for conventional cash-settled assets. Where a client’s custodianis asked to record and value outstanding forward contracts, the information that the custodiangets should be after successful conﬁrmation.12.1.8 Investment management agreementCurrency overlay is an investment management assignment, and it should be contractuallytreated just like a more conventional assignment in equities or bonds. While the investmentguidelines for currency overlay are overlay-speciﬁc, the investment management agreementcan be largely a standard form.12.1.9 Reporting requirementsHow currency overlay is reported is critical to the client’s perception of its value, and indeedits performance. The important point here is that the chosen benchmark genuinely reﬂectsthe perception of the client (i.e. in answering the question ‘how did the currency overlaymanager do?’), and that reporting accurately follows the benchmark decision. As an example:suppose the client chooses a fully hedged benchmark, has given the manager 0–100% hedgeratio leeway (with cross hedging bound by these restrictions too), and the overlay manageris reporting on a period when the domestic currency is weak. The currency overlay will be‘losing money’, and there will be cash outﬂows. However, it is likely that the active currencyoverlay will be adding value versus the benchmark, since only by getting the direction 100%wrong for all currencies could the manager perform as badly as the benchmark. Hence theexcess return versus benchmark will be positive, and may be very positive, even while cashhaemorrhages. If the currency overlay reports to the client highlight the positive performance,and the client is content with the performance of the manager, then the reporting and thebenchmark are congruent. If, on the other hand, the client is uneasy about the cash outﬂow, oris concerned about the impact of the currency overlay’s performance on the whole portfolio,then the benchmark should probably be reviewed, since it clearly does not represent the ‘neutral’position of the client. The reporting should then follow the revised benchmark.
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Two features of currency overlay mean additional reports over and above conventionalmandates. The ﬁrst is cash ﬂow. Cash ﬂow is a (delayed) reﬂection of the gross performanceof the overlay, although not, as we have seen above, of performance versus the benchmark.However, efﬁcient management of the whole portfolio requires that cash ﬂow is forecast asfar ahead as possible (although that may not be very far, depending on the overlay manager’schoice of forward contract maturities). These forecasts need to be communicated to the clientin cash ﬂow forecast reports. The second is the credit exposure that the client runs when thereis strong positive gross performance from the overlay. Under these circumstances, and againdepending on the maturity of the forward contracts, the client may wish to know the bankcounterparties who owe him substantial amounts of money. This is not academic – where thereare concerns with the credit of a large indebted counterparty, it is possible to close out forwardcontracts and accelerate the settlement of the cash by negotiation with the bank in question.12.1.10 Periodic cash and contract reconciliationThe client will usually choose to use his custodian to record forward contracts undertaken byhis overlay manager, and to reconcile these, and the resulting cash ﬂows, with the manageron a regular basis. However, the role of the custodian is a little different in currency overlayfrom conventional asset management. Forward currency contracts (which are the dominantinstrument used by overlay managers) are not initially ‘valuable’ in the way that equities orbonds are. So the conventional role of the custodian to ‘look after’ the securities in a portfoliodoes not apply in the case of currency overlay. It is perfectly possible, therefore, to not involvethe custodian in the overlay record-keeping process, and still retain the security of a third-partycheck on the accuracy (and existence) of the forward contracts from the bank conﬁrmationprocess.12.1.11 Bank contract settlement proceduresExcept in special circumstances (like manager transition), forward currency contracts will beclosed out by the overlay manager prior to maturity. In many cases, the closing-out contractwill not be executed until the spot date, which is two days prior to the maturity date (see p. 37for details). This means that the manager and bank counterparty must then agree the amounts ofcash settlement, and the manager is responsible for informing the custodian of the amounts tobe paid and received for each relevant value date. The client must be satisﬁed that the checking,reconciliation and authorisation processes are reliable and secure, although generally speakingthe client will not be required to play an active part in this process.12.1.12 Benchmark calculationAside from the strategic decision of what the benchmark hedge ratio is to be (for risk-reducingmandates) or what the return benchmark is to be (for alpha mandates), it is clearly importantthat the client is satisﬁed that the calculation of the benchmark is accurate and transparent, andideally independent of the manager. As discussed previously (Table 7.1), there are a numberof index providers that produce hedged benchmarks. If one of these ﬁts the mandate for theunderlay, then the hedged (or a mix of hedged and unhedged) version provides a ready-madecurrency overlay benchmark. However, mostly the actual weights of the international assetsto be hedged will not exactly match the weights of proprietary indices, and many clients will
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therefore want to develop a bespoke benchmark. There are only three candidates who aregenerally in a position to design and calculate a bespoke benchmark: the custodian; the client’sinvestment consultant, and the currency overlay manager.In the author’s experience, custodians have little expertise in currency hedging and currencybenchmarks, and their strength lies only in the routine calculations required once the formulaeand data sources are established. There is considerable expertise in some of the larger investment consultants, although it tends to reside in specialist currency research units or in particularindividuals. Most investment consultants are not geared up to provide regular, systematisedmonthly reports – so while they may be able to design a benchmark, they probably cannotdeliver it in real time.The most detailed expertise, together with systems and processes, to deliver real-time benchmarks lies with currency overlay managers. For many clients, the disadvantage of the loss ofindependence brought about by using their manager to also calculate the benchmark is overcome by the convenience and accuracy that a knowledgeable and informed manager can bringto the calculation. If the calculation methodology is transparent, and the data source is publishedand independent, then the loss of independence may be more imaginary than real.12.1.13 Performance measurementPerformance measurement ﬂows naturally out of the benchmark calculation and the reportingof the gross overlay performance. The excess return of the gross overlay performance over thebenchmark performance is the bedrock of the performance measurement, and the volatility ofthat value – tracking error – is the other key measure. With these two values, the progress of theoverlay mandate can be monitored, and compared to the targets in the investment guidelines.The principal responsibility for reporting lies with the overlay manager. A well-designedperformance report will give the client clear and unambiguous performance reporting. Theclient, however, may also want the custodian to replicate the key elements of the performancereport, both as conﬁrmation of the source numbers (marked-to-market valuation of outstandingforward contracts and cumulative cash ﬂow) and as an independent calculative check. Theconsultant is likely to be involved in the design-only phase.12.1.14 Summary check-listCheck-list item
Considerations
Decision/action made by
Mandate type
(a) Risk reducing (active or passive);(b) alpha onlyInternational exposure and riskaversionActive risk/return positioning
Investor/consultant
For risk-reducing overlay –benchmark hedge ratioInvestment guidelines –activeInvestment guidelines –passiveInvestment guidelines –alphaBank FX linesBank contract conﬁrmation
Tracking error/cash ﬂowconsiderationsSize of mandate/active risk/returnpositioningSpread of counterparties and creditratingsFail-safe
Investor/consultantInvestor/managerInvestor/managerInvestor/managerManagerManager/bank/proprietaryelectronic conﬁrmationsystem
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(cont.)Check-list item
Considerations
Decision/action made by
Investment managementagreementReporting requirementsPeriodic cash and contractreconciliationBank contract settlementproceduresBenchmark calculationPerformance measurement
Commercial, prudential andregulatory considerationsTo match investor’s needsFail-safe third-party process
Investor/manager
Secure/accurate/daylight riskminimisingTransparent and independentIndependent and accurate
Investor/managerManager/custodianManager/custodianConsultant/index providerManager/consultant/custodian
12.2 PRACTICAL QUESTIONS AND ANSWERSQuestion: I believe that active currency management is no more likely to make money thanactive equity management. Does this mean I can forget about overlay?Answer: If an investor is not convinced that they can identify an active currency manager,this rules out active overlay and currency alpha. However, whether or not currency can addvalue, there is a signiﬁcant reduction in risk available (by adopting a fully or partially hedgedbenchmark) at almost zero cost for most investors. This would be the adoption of passiveoverlay.Question: I believe in active currency management. Do I need to have a complete review ofmy strategic hedge ratio before looking for active currency managers?Answer: No. An investor can exploit currency inefﬁciencies using currency alpha withoutchanging any strategic benchmarks.Question: How do I manage cash ﬂows from overlay?Answer: For active overlay, limits can be built in to cash outﬂow. For many investors, thiscash requirement will be less than their normal cash allocation, and therefore no specialarrangements need to be made. For larger overlay programmes, or for passive programmes,the investor may need to ask the overlay manager and custodian to arrange a process forcash to be realised from (or invested in) low-trading-cost securities (large cap equities, bonds).Alternatively, the investor can hold higher cash allocations with a futures overlay that ‘equitises’or ‘bondises’ the cash.Question: Can I have overlay without cash ﬂows?Answer: Not for equities. However, it is possible to extend the cash horizon by the use oflonger-dated forward contracts. For bonds, however, cash ﬂows can be matched to the interestand bond payments, and in effect become invisible – and this is effected by a currency swap.Question: What fees should I expect to pay for overlay?Answer: Management fees are highly dependent on scale, complexity and other client-speciﬁcfactors. However, as a guideline, average fees for active overlay tend to be in the 10–15 bpp.a. region (assuming a $500m mandate), and average fees for passive overlay are 3–5 bpp.a. Fees for currency alpha depend on the target level of return, but will generally have a
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management (asset-based) fee component (perhaps 20–25 bp p.a. depending on target return)and a performance-based component (say 20% of new high-water-mark).Question: What exactly does ‘cross hedging’ involve?Answer: Cross hedging is where the manager will undertake forward currency contractsbetween two currencies, neither of which is the investor’s base currency. This will generally,although not always, mean that the investor increases exposure to one currency (the boughtcurrency) beyond the exposure in the underlying assets. If that is the case, then the hedge ratiofor at least one currency will lie outside the 0–100% range. If, despite cross-hedging contracts,hedge ratios of all currencies continue to lie in the 0–100% range, then it could be argued thatcross hedging is not really taking place, since that effect could be replicated by doing all dealsvia the base currency.Question: I have a very low international asset allocation. Can I use overlay?Answer: You can use currency alpha to exploit currency inefﬁciencies. If your total international exposure is very low (say less than 10% in each asset class), then there is unlikely to bea good case for active or passive risk-reducing currency overlay.
13Looking AheadThis is a speculative chapter, and since it will reﬂect my unsubstantiated opinions, it is likelyto be of less interest than the earlier chapters with evidence and analysis. It will also be short.
13.1 DEVELOPMENT OF ACTIVE MANAGEMENT STYLESThe process by which management styles in any asset discipline become established is a studyin itself. A keen observer of investment managers may observe a number of characteristicswhich seem to be enduring:
r Styles go in fashion – and like fashion, are to some extent ‘returning’.r There is a process of ‘style natural selection’.r Styles become established in any asset class quite early in an asset class’s life; despite smallchanges at the margins, and the vagaries of fashion, they persist.
r Advances in information processing technology have allowed some quantitative styles todevelop, but have not dominated style changes.Currency management styles have conformed to these guidelines quite well. Within a very fewyears of the advent of currency overlay, three core styles emerged – fundamental, technical andoption-based/dynamic hedging. Most managers still recognise these descriptions, and they stillgive clients and consultants a reasonable guide as to the way a manager constructs a process.Some managers have argued that they no longer ﬁt well into these categories, although myinstinct tells me that existing style categories will continue to be pressed into service, even ifthe ﬁt is not perfect.What about completely new ways of identifying and exploiting currency movements? Wecould perhaps look at other asset classes to prompt our thoughts. Equity managers use thetop-down/bottom-up distinction, and growth/value distinction, to cut styles along two planes.There are also ethical, contrarian/momentum, quantitative and style rotators. They also dealwith different classes – large cap, small cap. Hedge funds also have a wide variety of stylesunique to them: event-driven (takeovers, distressed situations); global macro (anything andeverything), market neutral, convertible arbitrage, and so on. Bond managers, dealing witha very speciﬁc asset class, probably have no styles which could transfer to currency. Anyopportunism they have displayed in the past in their own currency management of internationalbond portfolios can be wrapped up in the opportunistic hedge fund style description below.Can any of these concepts apply to currency managers?13.1.1 Top-down/bottom-upThis distinction perhaps resonates with the following in currency: a top-down manager is onewho starts the hunt for inefﬁciencies in the structure of the currency market. The structureapplies to all currency pairs, so general statements can be made about all currencies, not just
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speciﬁc pairs. ‘Top-down’ currency managers would be students of the market place; theywould gather and analyse the nature and motivations of the currency market players, pore overBIS reports when they are issued, lobby for more frequent data about participants and theirbehaviour, try to assess the effect of changes in the banking industry on the market, and studythe changing behaviour of other, identiﬁable, classes of player such as corporate treasurers,central banks and various investor groups. By contrast, bottom-up managers might be thoughtof as pure fundamental managers, concerned with the full range of speciﬁc factors whichimpinge on each currency pair. They try to become more knowledgeable about each pair thaneveryone else in the market (a task so difﬁcult it borders on the impossible).13.1.2 Growth/valueIt is a struggle to shoe-horn this distinction into the currency context. Its closest parallel isperhaps the ‘search’ for value in currencies by analysing and exploiting the forward rate bias,since a currency’s interest rate is the closest thing we can get to a value measure. However, thelack of the concept of price/earnings ratio (p/e) in currency, and the role of expectations in themovements of p/e values, means that the analogy largely fails.13.1.3 Contrarian/momentumI have put contrarian with momentum as two ends of a similar spectrum. They do have a parallelin currencies, which is technical analysis. While contrarians are not formally quantitatively ortechnically driven, in practice they are mean-reversion supporters. The intellectual argument isa little more sophisticated. A contrarian argues that if ‘everyone’ thinks that stock X or indexY is going up, then that means that all the investors who have the ability to buy it, already have.This means that the only �