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Managing overlays: a new perspective on performance measurement
Published on July 13, 2005
More and more investors use overlay programs to hedge undesired risk exposures to, for instance, foreign currencies. Investing in the Japanese Nikkei, for example, not only results in a risk exposure to the Japanese market but also to the exchange rate of the Yen. This means that positive returns on your investment may be reduced by a decreased market value of the Yen. Currency hedging is an instrument used to decrease currency exposure by determining a fixed exchange rate for investments in foreign currencies. ORTEC recently developed a new module for its PEARL performance measurement and risk evaluation system, which allows you to evaluate such overlay programs.
Currency markets already offer numerous products that very effectively take away most of the currency risk. The same is true for interest risk. Since liabilities are increasingly valued based on the market value, actual interest risk is shown. For this reason, many institutional investors are using overlay programs to better match the duration of investments and liabilities.
The use of overlay programs is well established in the professional investment industry for some years now. However, the performance measurement tools still lacked a sound framework for evaluating such strategies. As of now, ORTEC provides a solution for this with its new overlay module in PEARL.