In many ways alpha seeking firms trading FX have endured something of a perfect storm of return reducing conditions over the past few years.
Interest rate differentials are still largely non-existent as central banks persist with low interest rate policies. Many banks have pulled back from both principal risk taking and credit provision in FX, making life harder for their buy side counterparts.
Regulations continue to take their toll on both buy and sell side firms, introducing new cost pressures and causing budgets to be increasingly diverted towards compliance functions.
It’s not necessarily that extracting alpha in FX has become harder, but rather that the way it needs to be extracted is changing, said panellists at Profit & Loss’ Forex Network Chicago conference.
Douglas Cilento, global head of execution at AQR, opened the discussion by point out that FX has traditionally been viewed as a good market for generating alpha because there is a large segment of non-profit seeking market participants, there are inefficiencies in the market and, because currency is not something that can be bought and held with the expectation of a return, it is effectively a market without beta.