Currency Overlay vs. Separate Asset Allocation is there a large difference between these two I’m missing because they strike me as pretty similar !
Yes, currency overlay - hiring different manager who will manage currency exposure. Asset allocation - you are managing currencies as separate assets
It is a matter of oprimization. In Currency Overlay there is a second manager in charge of currency allocations, but whole is managed to the same strategy and asset allocation and currency hedging decisions are concurrently optimized within one framework. Separate Asset Allocation currency is taken as a seperate asset and asset allocation decisions and currency decisions are evaluated separately. So it is more likely to create sub-optimal solutions.
Hiya Turkiya Wrote: ------------------------------------------------------- > It is a matter of oprimization. In Currency > Overlay there is a second manager in charge of > currency allocations, but whole is managed to the > same strategy and asset allocation and currency > hedging decisions are concurrently optimized > within one framework. > > > Separate Asset Allocation currency is taken as a > seperate asset and asset allocation decisions and > currency decisions are evaluated separately. So it > is more likely to create sub-optimal solutions. sure about suboptimal? didnt hear this one anywhere
ehm i dont think thats right about suboptimal. separate allocation is when you are really focusing on the currency itself, say, perhaps because you want to trade forex. in currency overlay, there is significant currency exposure, so they bring in a currency manager to address the need since currency stuff is some specialized and most people cant do it. speaking of which, DONT TEST THIS CRAP HEAVILY CFAI. NO ONE USES THIS OR CARES ABOUT IT. thanks.
Yep. I am sure, Currency Overlays are suboptimal, currency as a separate asset class is an extreme case of currency overlay. Below is my CFA notes (but don’t ask about page number:) 1.Balanced Mandate: Manager is responsible for all aspects of international portfolio management. The investment manager will optimize simultaneously the asset allocation and the currency hedging decisions. 2.Currency overlay: Currency overlay manager decides on the positions taken in currencies and manages currency risk. However, currency management is still part of the overall management process of the whole international portfolio. 3.Currency as a separate asset allocation is an extreme approach to currency overlay. It treats currencies as a totally separate asset class. The manager of the international portfolio is assumed to be passive in currency terms, but a specific sum is allocated to a separate account with active management of currencies. The management of that allocation is done independently of the rest of the portfolio. Currency overlays are suboptimal. It is better to optimize simultaneously the asset allocation and the currency hedging decision.