Invest in Currencies - dummies

By David Stevenson

Many hedge funds like to dabble in currencies — they positively adore the depth and liquidity of these markets ‒ but you don’t find many private UK investors (or pension funds for that matter) popping more than a tiny percentage of their portfolio in foreign currencies or an FX-based fund. Investing in currencies remains a slightly esoteric pursuit, strictly for the more adventurous.

Yet this lack of interest in currencies is a tad perplexing. After all, the currency foreign exchange (FX) markets are truly global in scale, with massive liquidity. Average daily turnover in the global FX market is US$4 trillion, which is 12 times the average daily turnover of the world’s share markets and 50 times the turnover of the New York Stock Exchange.

The annual turnover of the FX markets is currently running at around ten times world GDP!

Surprisingly, despite the general reluctance of private investors to jump into the currency pool, ordinary investors now account for 8 per cent of investment trading volume according to research firm Aite Group, up from less than 1 per cent a decade ago.

A variety of reasons may explain this increase: the cost of trading (many firms don’t charge commissions), trading hours (round the clock), the relatively small amount of money you need to get started, and the growing sophistication of the private investor.