Do Foreign Exchange Fund Managers Behave Like Positive Feedback Traders?

This paper introduces a Heterogeneous Agent Model (HAM) for foreign exchange fund managers, and estimates it on currency trader indices. Fund managers dynamically allocate capital conditional on recent performance to a value strategy, a momentum strategy, and a carry strategy. Estimation results reveal that a large part of the behavior of currency managers can indeed be described by these three simple strategies, and currency managers behave like positive feedback traders at the short run, but as negative feedback traders at the longer run. We finally show that fund managers are switching in the correct direction, but could improve performance by switching less aggressively