Economists say alpha generation is a zero-sum game, so for every winner achieving it there is a corresponding loser in the market, which is why it is a true measure of a manager’s worth. To generate alpha, a manager has to stay ahead of a pack of aggressive, smart competitors. Currency overlay managers are starting to feel they have the expertise to do just that. Record Currency Management and A.G. Bisset are in the process of opening funds that will aim to generate alpha. “The move toward currency alpha has taken place within the last 18 months to two years,” Record Currency Management’s Neil Record says. Currency overlay managers who seek to generate alpha charge fees that resemble those of hedge funds—typically a 1 or 2 percent annual management fee, plus 20 percent of any returns. Because of this, some investors have questioned whether it is better to invest in hedge funds for alpha generation, since the fees, strategies and goals of hedge fund managers are similar to those of overlay specialists. The latter group responds by emphasizing its currency market proficiency.

“Most currency overlay guys in the market have a healthy skepticism of the quality of hedge funds in respect of currency,” Record says. “Our view is that they are amateurs. Almost universally they do not come from the currency world; they come from the equity and fixed income world. They tend to hunt in packs and come and go. They do a trade while it works, then when it spectacularly doesn’t work, they all leave, lick their wounds and move on to a different market, whereas we have to be here for the long haul.”

Still, some currency experts, such as Marco Bozzolan of Perréard Partners Investment in Geneva, are skeptical. “A lot of people claim there has been a shift into using currencies as an asset class, but, in my view, currency overlay should still be regarded as a reduction of risk in an investment portfolio.”

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