Transforming Currency Exposure Through An Active Currency Overlay

Chapter 7 of our 'A Comprehensive Guide to Currency Issues for Institutional Investors' introduces active currency overlay.

It explores how active currency overlay is an essential strategy that all international investors with unmanaged FX exposure should consider. 

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Programmes seek to transform investors’ existing currency
exposures into a portfolio of preferred currency exposure with an improved risk-adjusted return profile.


Institutional investors' FX exposures are embedded in their international asset holdings resulting from equity and fixed income allocations.

These currency exposures bear no relation to the investment merits of the currency but rather, emanate from the asset class capitalisation weights of the index constituents.

These exposures can be transformed via a currency overlay programme to a preferred currency allocation weighting to improve the risk-return characteristics of the currency exposures.

Programmes trade Developed and Emerging Market Currencies.


We use quantitative investment techniques with input from our independent economics team to transform existing exposures to a preferred currency portfolio.

A combination of fundamental factors and market dynamics reflecting both exogenous and endogenous inputs are used to derive insights for currency positioning.

Active currency overlay programmes can be managed on a stand-alone basis or in combination with a passive hedging strategy which can form the performance benchmark against which to measure the success of the active overlay strategy.


An active overlay strategy aims to improve the risk/return characteristics of an international portfolio through the active management of embedded currency exposures.

Active returns are typically uncorrelated to traditional equity, bond and commodity markets and thereby are attractive from an asset allocation and portfolio construction perspective.  

Active currency overlay programmes are provided as unfunded managed accounts and are therefore highly capital efficient.  

Programmes can be customised to target specific levels of tracking error, currency universe, financial instrument and counterparty credit rating.