Some firms go as far as to suggest that investors put a considerable percentage of assets into currency-based strategies. Bilal Hafeez, the global head of foreign exchange strategy at Deutsche Bank, published an influential paper, Currencies: Pensions’ Savior?, last August in which he recommended a 20 to 30 percent allocation.

Since 1980, forex has exhibited long-term systematic returns that are comparable, if not better, than both bonds and equities.

Though Hafeez’s research was tailored to the needs of institutional investors, his conclusions, if valid, would also apply to private investors. "[Foreign exchange] has exhibited long-term systematic returns, or beta, that are comparable, if not better, than both bonds and equities since 1980," he says. "It also has greater liquidity than both." Foreign exchange returns also exhibit very low correlation with returns in the equity and bond markets.

By long-term systematic returns—beta—Hafeez is referring to the return attributed to market performance in general, rather than manager trading or selection skill. Beta is often measured by a benchmark index for a given market—the risk and return produced by the S&P 500, for example, reflects the beta of large-cap U.S. equities. Investors who want to earn the market’s beta return can therefore put their assets into products linked to the S&P 500.

However, it is far more complicated to capture the beta of currencies. While it is easy to create a benchmark for broad-market returns in equities—simply aggregate the performance of a given number of stocks, weighting them by some criteria, typically market capitalization—creating a benchmark of currency returns is another matter. Securities have an intrinsic value. But the concept of value in foreign exchange is determined by how one currency moves in relation to another. Investors can have long positions in equity or bond markets, but in forex markets, to be long in one currency means, by definition, to be short another. "If you have currency and you just sit on it, then you just have risk in your portfolio," says Pierre Lequeux, head of currency management at ABN Amro Asset Management in London. "You need to have an investment process attached to currency in order to release the value of foreign exchange." There is therefore no natural or easy way to create a beta benchmark for currency returns.

One work-around is to aggregate the performance of foreign exchange-only fund managers. However, as with the hedge fund indices that adopt a similar approach, this is fraught with a number of well-known problems, such as the selection bias of managers, a lack of representation and survivorship bias—the tendency for funds that have gone out of business to fall out of the index, leaving only the strongest players and skewing the index unrealistically upward.

As an alternative, Hafeez suggests building an index using a number of replicable rules. He would allow a currency strategy into this benchmark if it meets several criteria. First, it must involve one of the world’s top 10 currencies, in order to have a high degree of liquidity. It must also fall into one of three of the most widely used forex investment styles: (1) It must have a positive yield, also known as "carry"; (2) it must have positive momentum; and (3) it must be undervalued. The specifics of how each individual trade is put in place are complex, but these three strategies are the main ways foreign exchange managers get value out of the market.

When back-tested to 1980, these combined investment styles deliver annualized returns of 12 percent, with a Sharpe ratio (a measure of risk-adjusted return; the higher the ratio, the better the historical risk-adjusted performance) of 0.92. The equivalent for equities is 11 percent annual return and a Sharpe ratio of 0.27, and for bonds an average annual return of 9 percent with a Sharpe ratio of 0.38. Meanwhile, equities and bonds have had a 20 percent correlation in monthly returns since 1980, but the combined forex strategies correlated just 2 percent with equities and -12 percent with bonds. On paper, at least, this means foreign exchange is a good diversifier of portfolio risk. The results led Hafeez to conclude that investors may be missing opportunities to improve their portfolio performance by not having pure forex exposure.