Evaluating Currency Overlay Strategies

As the Chief Investment Officer of a global investment firm, you are analyzing the feasibility of implementing a currency overlay strategy for your international equity portfolio. The portfolio is currently exposed to various currencies, and recent market volatility has raised concerns about currency risk.

You are considering three different approaches for your currency overlay strategy:

1. Active currency management through tactical asset allocation to enhance returns.

2. Hedging currency exposure using forward contracts to maintain a fixed exchange rate.

3. Dynamic currency overlay that involves using a model to forecast currency movements and adjust exposures accordingly.

Which of the following approaches is most likely to provide the best risk-adjusted returns, considering your firm's investment philosophy and the objective of enhancing performance through active management?