Global currency market turnover has risen substantially the past few years, from an average of $3.3 trillion a day in April 2007 to $4 trillion in 2010. The increase has been driven largely by increased trading activity by hedge funds, pension funds, mutual funds and insurance companies, where turnover rose by 42%, according to the Bank for International Settlements. There are several reasons why investor demand for currency exposure is increasing: low correlations to traditional asset classes, inherent market inefficiencies and potential profit opportunities, relatively low volatility and high levels of liquidity.
The growth of the currency market has occurred amid a global financial crisis and subsequent crash in the value of many financial assets. The financial crisis of 2008 may have acted as a catalyst in increasing demand for currency exposure. Many investors came to the harsh realization that their portfolios were not adequately diversified to protect against downside risk. The currency asset class, which can exhibit low correlations to traditional classes as well as an attractive risk/return profile, may help solve this problem.
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