The Need for a Better FX Benchmark

Philippe Bonnefoy, founder of Eleuthera Capital, explains why the FX industry suffers due to a lack of an effective industry benchmark.

Bonnefoy discusses why the 4pm Fix can be beneficial, but points out that it also suffers from potential gaming. He then adds that benchmarking remains a huge issue for investors trying to work out whether they should consider FX as an asset class or not.

“With an equity benchmark, you know what the index is doing, for fixed income you know what the composite bond or the bond benchmark in 10-year Treasury is. For FX, is it cash? Is it a three-month yield? Is it overnight pricing? How do I say that you created value for me in trading FX other than just saying whether you were positive or negative?,” asks Bonnefoy.

He adds that there is still no good way for currency managers to tangibly demonstrate their value because there is no true FX benchmark, saying that potentially the best alternative is to take a composite of FX manager returns – if this information can be publicly accessed – and then compare performance relative to that. However, Bonnefoy claims that investment consultants, who are often the gatekeepers of pension fund and insurance money, often want an index based on harder data to judge performance.

Despite this, he argues that FX is an asset class and that it can generate good returns for these investors.

“The big missing part of that conversation when you’re sitting with consultants is that [FX] is one of the few markets where the vast majority of participants are not profit seeking. FX, what is it? It’s a medium of expression of people who need to buy and sell goods and services, and that’s who dominates the flows,” says Bonnefoy.

He continues: “It means that it’s not actually a very efficient place, unlike the equity market where you’re competing against people who are expressing their views on the price of Apple or IBM. So I think there’s a lot of excess alpha to be collected because you’re ‘competing’ with people who are not profit seeking.”

Elsewhere in the interview, Bonnefoy talks about the broader implications of the changing nature of FX liquidity and how his firm has evolved over the years in response to the technological evolution of the FX market.

The full video interview can be accessed here:

Philippe Bonnefoy, founder of Eleuthera Capital, explains why the FX industry suffers due to a lack of an effective industry benchmark. Bonnefoy discusses why the 4pm Fix can be beneficial, but points out that it also suffers from potential gaming. He then adds that benchmarking remains a huge issue for investors trying to work out whether they should consider FX as an asset class or not. “With an equity benchmark, you know what the index is doing, for fixed income you know what the composite bond or the bond benchmark in 10-year Treasury is. For FX, is it cash? Is it a three-month yield? Is it overnight pricing? How do I say that you created value for me in trading FX other than just saying whether you were positive or negative?,” asks Bonnefoy.

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Galen Stops

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