Evaluating Currency Overlay Strategies

A portfolio manager oversees a global equity fund and is considering the implementation of a currency overlay strategy to manage foreign exchange risk. The manager believes that active currency management could enhance the overall portfolio returns by leveraging currency fluctuations. The fund primarily invests in developed markets but has a significant exposure to emerging market currencies.

In this context, the manager is evaluating three different currency overlay approaches: systematic quantitative strategies, discretionary active management, and passive hedging. Each of these approaches has distinct characteristics and potential impacts on the fund's performance. The portfolio manager aims to choose a strategy that aligns with the fund's investment objectives and risk tolerance.