How would a client evaluate a currency overlay manager in light of its client- specific nature?
Taylor: The best way for a prospective client to evaluate overlay managers is to first exclude those without a sufficiently long and verifiable track record of performance. The next level of evaluation by the prospective client should be to ask the manager to construct an actual performance composite for accounts in which the base currency, underlying portfolios, starting points, benchmarks and mandate guidelines/constraints are the same as the prospective client’s. The performance results of the portfolio can then be compared across managers by the prospective client himself. There will still be potential performance discrepancies between these composites based on several things which are much tougher to analyze in retrospect, such as proxy portfolio creation techniques, tracking error, hedging techniques (e.g., timing, maturity and choice of instrument), execution costs and period of compounding. In the same way that currency managers are evaluated on the basis of a Sharpe Ratio or o
