Research

This study is the extention of the previous article on systematic currency management and provides a detailed framework for incorporating currencies into multi‑asset portfolios, emphasizing the diversification benefits of active currency exposure. Our findings demonstrate that adding currencies to a traditional bonds‑and‑equities portfolio can materially improve risk‑adjusted returns. We present three systematic approaches to modeling foreign exchange within asset‑allocation frameworks, each targeting distinct exposures to the carry, value, and trend factors. Across all three models, active currency strategies enhance drawdown profiles and reduce overall portfolio volatility, while delivering incremental positive returns. Because currencies lack fixed cash flows and typically generate near‑zero long‑term passive returns, pure passive investment in FX is impractical. The major contribution of this study is therefore the development of a systematic methodology for estimating and implementing active currency benchmarks—tools that investors can reliably use within portfolio construction and tactical asset‑allocation processes.​

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This article explores the transformative role of network models in modern finance, emphasizing their application in portfolio management and risk assessment. Traditional financial models often struggle to capture the complexity and interconnectedness of global markets, relying on linear assumptions that overlook systemic interdependencies. Network theory addresses these limitations by visualizing financial systems as dynamic webs of relationships, in which nodes represent entities such as assets or institutions, and edges capture their interconnections. The article describes the foundational principles of network science, illustrating how metrics such as centrality, clustering, and modularity enhance the understanding of diversification and systemic risk. Practical applications are highlighted through case studies, including portfolio optimization, contagion analysis, and thematic investing, demonstrating the real-world utility of network-based approaches. The discussion also examines the integration of network theory with emerging fields such as ESG investing and machine learning, demonstrating its adaptability to evolving industry needs.

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Revolutionizing Portfolio Management with Network Theory | Portfolio Management Research

​This article aims to provide information on how networks gauge and visualize complex interactions and relationships between assets, factors, or other economic variables. The authors show that networks are helpful in portfolio and risk management and explain the important properties and metrics that describe networks and show examples of network applications. They discuss how the different types of networks—information, technological, social, and biological—have common properties that find their justification in finance and can be used in portfolio and risk management. Understanding the building elements of graphs and appropriate metrics provides valuable tools for researchers to deal with interacting risk entities. The article highlights and provides examples of how networks can be among the most complex graphs, and their use in portfolio management is bright and promising.

Network theory helps to resolve allocation problems and issues of systematic risk propagation in hedge fund networks because it allows for the hedge funds to be shown as interacting entities. Importance scores and cluster analysis support the understanding of risk propagation and causality, and capture the time-varying interconnectedness among hedge fund strategies. Furthermore, considering cluster affiliation, network metrics derived from importance scores help separate active management from active risk monitoring and build diversified portfolios. Hedge fund indexes with large centrality scores are less meaningful as risk indicators because the importance scores are time-varying. Hedge fund indexes with low centrality scores are weakly connected, but their diversification and return enhancement advantages are time-varying. Correlation networks use asset prices, are the most widely used graphs, and are easy to implement. However, the difference between directed and correlation networks is one of the most important factors because there is a direction in risk flow.

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Hedge Fund Networks | Portfolio Management Research

This article focuses on European bond and equity portfolios, and specifically the relevance of balanced portfolios. European equity and bond markets have undergone tremendous changes since the launch of the European Monetary Union (EMU) in 2000. Describing the risk–return profile of these markets provides valuable information about past structure and historical returns, and shifts the focus onto future expectations for institutional portfolios. The great volatility and low returns involved in European equity markets are a possible explanation for why investors prefer bonds that show Sharpe ratios higher than one. Taking into account five-year realized inflation, as well as strong bond market performance in the past 20 years with yields in the negative territory, the evidence indicates that the window for expected returns on balanced portfolios with large bond exposure is firmly shut. There are two challenging issues for European portfolio allocation. The first reflects the future of bond exposure in a balanced mandate. The second involves meaningful allocation to equity markets in a balanced portfolio.

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What Portfolio in Europe Makes Sense? | Portfolio Management Research

In this paper, the authors estimate portfolio volatilities and use variance−decomposition techniques and Cholesky factorization to construct a portfolio volatility spillover index. Furthermore, the authors show that spillover risks are persistent and much more common than well-known indicators like the turbulence index and the CBOE VIX index might suggest. Moreover, portfolio volatilities show contributions to and from other portfolio volatilities, which indicate elevated financial market interconnectedness and heightened risk. Foreign exchange contributes strong volatility shocks to other portfolios. More importantly, its contribution has a different magnitude and direction after the Global Financial Crisis (GFC) than before depending on the base currency. To show the causality effects of portfolio volatility spillover the authors apply both econometric models and graph theory, demonstrating that the importance is time varying. This requires monitoring and analysis in decision making regarding portfolio management, portfolio construction, and risk management.

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PORTFOLIO VOLATILITY SPILLOVER | International Journal of Theoretical and Applied Finance

Currencies are inherently a quantitative asset class, with clearly defined frameworks for estimating expected returns and risk. However, their interaction with other asset classes in a multi-asset portfolio can often lead to portfolio disruptions. In this article, the author offers perspectives on systematically integrating the four primary currency styles associated with specific risk premiums into a broader investment process. He examines the relationships between currencies and equities, currencies and bonds, and currencies within multi-asset portfolios and highlights specific frameworks and advantages for incorporating currencies as a distinct, alpha-generating, and risk-mitigating asset class.

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On Systematic Currency Management | Portfolio Management Research

In this article, we provide an in-depth illustration of how to use derivatives for hedging foreign exchange (FX) risks in global bond portfolios. It focuses on a yield-curve-based approach, using factor models to effectively decompose and manage both currency and interest-rate exposures. The central methodology illustrated is the analysis of yield curves to comprehensively assess and mitigate the FX risks embedded within global bond portfolios. Employing a seven-factor model, which incorporates FX carry, value, and momentum, among other factors, we illustrate how to explain portfolio returns and manage the associated currency risks. Considerable emphasis is placed on understanding the interplay between bond pricing, currency volatility, and the strategic use of FX options to mitigate risk. This approach described is crucial for portfolio managers seeking to optimize their management of multicurrency exposures, by aligning hedging strategies with the portfolio’s base currency to improve both performance and risk control. The illustration clearly demonstrates the complexity of FX hedging and the critical role of integrated yield curve analysis in global investment strategies.

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Improvements in Global Bond Portfolio Risk Management and Performance by Hedging the Components of Total Risk with Derivatives | Portfolio Management Research

This article highlights some of the main practical errors and challenges associated with investing in Economic and Monetary Union (EMU) government bonds and the difficulties in implementing EMU government bond strategies. These challenges refer to both portfolio allocation and to factor bond portfolios. Different country economic fundamentals, central bank policy, market timing, market risks, model and management risks, liquidity, and idiosyncratic country risks as well as spillover effects should be considered when investing in individual EMU government bonds. These essential properties of EMU bonds are not adequately addressed in portfolio allocation models (e.g., the tracking error or the mean–variance optimization) applied to single bond portfolios from equity investing. The main EMU government bond disparities are associated with country risks, which can be generalized to the main difference between core and periphery country yield spreads.

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Errors and Challenges Associated with Investing in EMU Government Bonds | Portfolio Management Research

Optimizing in local currency or in currency-adjusted expected returns depends on the portfolio base currency. Currency unhedged portfolios are more suitable for EUR-based investors and much less for CHF-based portfolios. The appreciation of the portfolio base currency represents a serious risk. Emerging market bond portfolios gain from the absence of currency risk when the portfolio base currency is the US dollar. The empirical results reveal that traditional models such as mean-variance optimization (MVO), minimum-variance optimization (MinVo), and Sharpe ratio optimizations are suitable for portfolio allocation, using both local currency and currency-adjusted expected bond returns as inputs in the optimizations. However, network- and centrality-based allocations outperform traditional models.​

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Emerging Market Bonds: Expected Returns and Currency Impact | Portfolio Management Research​​

Using factor models we empirically investigate the performance of European Monetary Union (EMU) bond managers. We find that (1) alpha is time varying, (2) bond managers exhibit alpha in the short run as opposed to long-term prior to the Global Financial Crisis (GFC), and (3) bond fund alpha is associated with government bond funds and funds with heavy exposure to government bonds. Our factor models do not detect alpha in corporate and high-yield bond funds on average. We observe that alpha was much higher in the period prior to the GFC that began in 2008. The number of funds in our sample generating alpha dropped significantly after that crisis and remained very low from 2008 to 2017 as EMU markets recovered. We apply three models to evaluate EMU bond fund manager alpha. We use the two bond-market related Fama-French factors – term and default. In addition, we use the three equity market-related Fama-French factors – size, value, and market – together with the momentum factor. We find evidence that the bond market-related Fama-French factors are significant for the EMU bond funds in our sample, but the equity market-related Fama-French factors are not. By applying factor analysis to the returns of EMU bond funds, we (1) identify the economic drivers of EMU bond market returns and (2) show the performance of bond portfolio managers regarding alpha prior to the GFC and explain the possible lack of alpha after the GFC

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Towards a dead end? EMU bond market exposure and manager performance - ScienceDirect