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Are Robo-Advisers Equipped to Handle Currency Volatility?

Currency markets are often considered the enemy of a quantitative multi-asset investor

Dan Kemp 28 March, 2017 | 17:32
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With the rise of robo-advice, people are beginning to comprehend how the practicalities will play out. Currency markets are often considered the enemy of a quantitative multi-asset investor, as they are incredibly complex and can often move in unexpected ways. The biggest problem is that historical relationships can easily break and correlation analysis can provide the wrong messaging.

There are countless ways a robo-model can approach such a situation, although the most common is to focus on long-term correlations between assets and ‘optimise’ holdings based on these relationships. In the case of currency markets this has significant scope for error, which we will help uncover.

Brexit Causes Issues for Robo-Advice

We are going to explain this using two key markets; the U.K. and the wider European market. What we want to know is how a robo-model would consider currency exposure in these markets. Taking the U.K. as an example first, we can isolate the relationship between U.K. equities and the GBP/USD. A robo-model is trying to quantify this relationship, typically into a single figure that helps explain the future relationship and guides positioning.

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About Author

Dan Kemp

Dan Kemp  is Chief Investment Officer, Morningstar Investment Management EMEA

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