FX hedge funds rethink strategies as returns fall

A decline in carry and momentum returns is forcing FX hedge funds to rethink their strategies. Some question if currency managers can still deliver attractive returns in an era of low beta returns.

For much of the last decade, foreign exchange (FX) trading was a pretty straightforward game.

Currency managers were able to earn healthy returns by exploiting a couple of simple factors: carry and momentum.

The carry trade involves selling a low interest rate currency and investing the proceeds in a higher-yielding currency, while momentum strategies exploit the tendency of FX moves to trend over time.

Data from Deutsche Bank shows carry and momentum strategies earned annualised returns of 7.27%