Why Institutional Investors Use Foreign Exchange Markets

How hedge funds, family offices and high-net-worth investors use forex for liquidity, hedging, diversification and active currency strategies

When conversations turn to currency trading, the mental image is often binary: on one side, a day trader watching technical charts; on the other, a simplified version of “forex investing” promoted through social media.

Neither image fully explains why hedge funds, family offices and other institutional investors participate in foreign exchange markets.

For these investors, forex is not simply a directional bet on whether one currency will rise or fall. It is financial infrastructure that can serve several purposes at once:

• managing currency risk
• hedging international investments
• implementing macroeconomic views
• improving capital efficiency
• diversifying portfolio exposures
• accessing systematic strategies such as carry

The scale and structure of the foreign exchange market help explain why institutional forex trading remains an important part of global capital management.

A Market Whose Depth Is Difficult to Grasp

According to the 2025 Triennial Central Bank Survey from the Bank for International Settlements, average daily turnover in global over-the-counter foreign exchange markets reached $9.6 trillion in April 2025, up 28% from $7.5 trillion in the 2022 survey.

The BIS survey covered more than 1,100 banks and dealers across 52 jurisdictions and is widely regarded as the most comprehensive source on the size and structure of global OTC foreign exchange markets.

The composition of daily FX turnover also reveals how the market is used:

• FX swaps averaged approximately $4 trillion per day and accounted for 42% of turnover.
• Spot FX represented 31%.
• Outright forwards represented 19%.
• FX options accounted for 7% after turnover more than doubled from 2022.
• Currency swaps accounted for approximately 2%.

FX swaps remained the largest instrument category, even though their share declined from 51% in 2022 to 42% in 2025. Outright forward turnover increased by 60%, while spot turnover increased by 42%. The BIS notes that swaps and forwards are commonly used for currency-risk hedging and funding-liquidity management.

These figures should not be compared directly with stock-exchange turnover. The BIS total includes spot transactions and several categories of derivatives, uses specific adjustments for double-counting and covers a global OTC market rather than a centralised exchange. It nevertheless illustrates the exceptional scale of the global FX market.

Trading is concentrated in major financial centres. Sales desks in the United Kingdom, the United States, Singapore and Hong Kong SAR accounted for 75% of reported turnover in April 2025. The United Kingdom alone represented approximately 38%.

The BIS also found that institutional investors accounted for about $1.3 trillion in average daily turnover, or 13% of the global market, while hedge funds and proprietary trading firms accounted for approximately 8%.

Scale matters because large investors need more than the ability to enter a position. They also need the ability to adjust or exit it without causing disproportionate market impact. The foreign exchange market is among the world’s deepest and most liquid financial markets, particularly in major currency pairs such as EUR/USD, USD/JPY and GBP/USD.

Liquidity does not eliminate execution risk. Spreads can widen and market depth can deteriorate during periods of stress. However, the scale of major FX markets provides institutional participants with execution capacity that can be difficult to match in less liquid instruments.

Liquidity Across Global Trading Sessions

The foreign exchange market operates across the global business week, with activity rotating through the Asia-Pacific, European and North American sessions.

This matters to portfolio managers because currency exposure may need to be adjusted after:

• an unexpected central-bank decision
• a geopolitical shock
• an inflation or employment release
• a change in interest-rate expectations
• a sudden repricing of international assets

When a domestic equity exchange is closed, major currency markets may still be active elsewhere in the world. This gives global investors a way to respond to changing conditions without necessarily waiting for the next local stock-market session.

The market is not equally liquid at every hour. Liquidity and spreads vary by currency pair, trading session, holidays and market conditions. Around-the-clock access should therefore not be confused with constant execution quality.

Efficient Capital Deployment Through Leverage

Forex trading is closely associated with leverage because market exposure can be created without paying the full notional value of a position upfront.

For retail traders, leverage is often presented primarily as a way to magnify potential returns. For professional investors, its relevance is more often connected to capital efficiency, hedging and portfolio construction. The mechanics of amplified exposure are covered in Leverage explained.

A global macro fund may hold views on:

• interest rates
• inflation
• monetary policy
• trade balances
• commodity prices
• relative economic growth
• geopolitical risk

Using forwards, futures, swaps or other derivatives allows the fund to implement currency exposure without allocating the full notional amount to each position.

This does not make the exposure low-risk. Leverage magnifies adverse movements as well as favourable ones and can create margin calls, forced reductions and losses that occur faster than expected.

Professional forex risk management can include:

• position-size limits
• portfolio-level exposure limits
• stop-loss rules
• liquidity constraints
• stress testing
• scenario analysis
• Value-at-Risk limits
• counterparty-risk controls
• collateral and margin management

The distinction is important: leverage used within a defined risk framework is not the same as leverage used simply to maximise position size. Position sizing explained covers how exposure limits are set in practice.

Currency Exposure as a Portfolio Risk

International portfolios naturally create currency exposure.

A euro-based family office holding US equities is exposed not only to the performance of those equities but also to changes in EUR/USD. A dollar-based investor holding European property or Asian equities faces the same issue in reverse.

An overseas investment can rise in its local currency while producing a weaker return after conversion into the investor’s base currency. It can also benefit from favourable currency movements even when the underlying asset performs modestly.

Currency is therefore not merely a trading opportunity. It is a distinct source of portfolio risk.

Mercer’s framework for managing currency exposure in family-office portfolios treats hedging as a strategic decision rather than a passive one. Its illustrative standard approach includes:

• fully hedging fixed-income and absolute-return holdings when currency exposure is not part of the investment case
• hedging around half of developed-market equity currency exposure
• leaving certain emerging-market equity and local-currency debt exposures unhedged when currency risk forms part of the investment thesis

These are illustrative institutional approaches, not universal rules. The appropriate hedge ratio depends on the investor’s base currency, liabilities, time horizon, asset mix, governance capacity, costs and risk tolerance.

Mercer also highlights currency-overlay strategies, in which currency exposure is managed at the total-portfolio level rather than separately inside every underlying investment.

Diversification Depends on the Strategy

Currency strategies are sometimes presented as having low correlation with equities and bonds. That statement requires qualification.

Forex is a market, not a single uniform investment strategy. The behaviour of a currency allocation depends on:

• the currencies being traded
• whether the exposure is directional or market-neutral
• the use of leverage
• the holding period
• the strategy’s response to volatility
• the prevailing monetary-policy regime
• how positions interact with the rest of the portfolio

Certain actively managed currency strategies can produce return patterns that differ from traditional equity and fixed-income exposures. However, correlations are not fixed. They can change sharply during crises, and multiple strategies that appear diversified in normal conditions can become exposed to the same risk factor during a market shock.

Institutional investors therefore evaluate diversification at the strategy and portfolio level rather than assuming that any forex exposure automatically provides protection.

Interest-Rate Differentials and the Carry Trade

One of the best-known institutional currency strategies is the carry trade.

A carry trade generally involves borrowing or creating exposure in a lower-interest-rate currency and investing in a higher-yielding currency or asset. The expected return is connected to the interest-rate differential, but the final result also depends on exchange-rate movements, transaction costs, funding conditions and volatility.

The BIS describes a carry trade as a leveraged cross-currency position designed to take advantage of interest-rate differentials and low volatility. It also warns that leverage makes such positions sensitive to exchange rates, interest rates and changing volatility.

Carry strategies can become vulnerable when:

• the funding currency appreciates
• expected rate differentials narrow
• volatility rises
• liquidity deteriorates
• investors unwind similar positions at the same time

The BIS has noted that rapid carry-trade unwinds can amplify exchange-rate responses to monetary-policy changes. This is one reason professional investors do not evaluate carry solely through the visible interest-rate differential. They also assess downside risk, funding conditions, market positioning and the possibility of crowded exits.

Carry is therefore not “free yield.” Its return may represent compensation for risks that become most visible during market stress.

Black Wednesday: A Historical Global Macro Example

A widely cited example of a macro currency trade occurred during the United Kingdom’s 1992 exchange-rate crisis.

Sterling had been participating in the European Exchange Rate Mechanism, which constrained exchange-rate movements within an agreed framework. Tension grew between the exchange-rate commitment and the economic conditions facing the UK.

On 16 September 1992, after heavy official purchases of sterling during exceptionally turbulent market conditions, the United Kingdom suspended sterling’s membership of the ERM. The Bank of England’s contemporary account describes how the consequences of German reunification, differences in economic conditions and the constraints of maintaining sterling’s ERM position contributed to the pressure.

A number of macro investors had taken short positions against sterling before the suspension. George Soros’s Quantum Fund became the most famous participant and was widely reported to have made a substantial profit from the episode.

The case is often used to illustrate global macro investing: investors develop a thesis about economic fundamentals, policy constraints and market pricing, then express that thesis through liquid financial instruments.

It should not be treated as a typical outcome. Large macro trades can also generate large losses, and historical examples selected for their success create significant survivorship bias.

When Forex Is a Tool Rather Than a Return Source

Many institutional investors already hold substantial international exposure through:

• listed equities
• government and corporate bonds
• private equity
• infrastructure
• real estate
• operating companies
• cross-border liabilities

For these investors, the primary role of the foreign exchange market may be risk management rather than profit generation.

The BIS data support the importance of this function. FX swaps, outright forwards and currency swaps together represent a substantial majority of reported turnover. These instruments are widely used for funding and hedging, although turnover figures do not reveal the purpose of every individual transaction.

A forward contract can allow an investor to reduce unwanted currency exposure without selling the underlying international asset. For example, a family office may wish to retain a European equity portfolio while separately managing its exposure to the euro.

Currency-overlay programmes take this separation further. They manage currency risk independently from the selection of underlying assets. An overlay can seek to maintain a strategic hedge ratio, make valuation-based adjustments or implement a more active currency mandate.

Parametric’s description of institutional currency overlays provides an example of how asset managers structure this type of risk-management service.

Safe-Haven Currencies Are Not Permanent Certainties

The US dollar, Swiss franc and Japanese yen have often been described as safe-haven currencies. However, safe-haven behaviour is conditional rather than guaranteed.

A currency’s response during a crisis may depend on:

• the source of the shock
• interest-rate expectations
• domestic monetary policy
• funding-market positioning
• current valuations
• existing carry trades
• capital flows
• geopolitical alignment

A currency that provided protection in one crisis may behave differently in another. Institutional investors therefore assess safe-haven exposure dynamically rather than relying only on historical labels.

This reinforces a broader principle: currency relationships evolve with policy regimes and market structure. Historical behaviour can inform risk analysis, but it does not guarantee a particular future response.

Family Offices Are Reassessing Currency Concentration

Currency diversification has become more prominent in family-office portfolio discussions.

The UBS Global Family Office Report 2026 surveyed 307 UBS family-office clients across more than 30 markets. The participating families had an average net worth of $2.7 billion, while their family offices managed an average of $1.3 billion.

UBS reported that:

• 60% planned changes to their strategic asset allocation over the following 12 months, the highest proportion recorded by UBS to that point
• 65% expected confidence in the US dollar’s reserve-currency status to weaken
• many respondents were reassessing exposure to US-dollar-denominated assets
• the euro and Swiss franc were emerging as preferred currency alternatives within broader multi-currency frameworks

This does not mean family offices are abandoning North American assets or the dollar system. UBS states that North America continues to represent the largest share of allocations.

The more defensible interpretation is that family offices are reviewing concentration risk and increasing diversification across assets, currencies and regions. This is strategic portfolio management, not necessarily a short-term directional trade against the dollar.

Wealth Preservation Through Currency Diversification

Many family offices and high-net-worth investors have wealth concentrated in a home currency because their capital originated from a domestic business, property portfolio or inheritance.

As that wealth becomes globally invested, currency diversification can serve a broader preservation objective. The goal may be to avoid excessive dependence on:

• one monetary regime
• one inflation environment
• one banking system
• one political jurisdiction
• one source of economic growth

Currency diversification does not remove risk. It redistributes exposure, introduces new correlations and may create hedging costs. The appropriate structure depends on the investor’s liabilities, spending needs, tax position, domicile and long-term objectives.

For this reason, institutional currency management is normally integrated into overall asset allocation rather than treated as an isolated trading decision.

Infrastructure That Supports Institutional Scale

The foreign exchange market is predominantly decentralised and traded over the counter rather than through a single global exchange.

Institutional participants can access pricing through banks, non-bank liquidity providers, prime brokers, electronic communication networks and other trading venues. Large organisations may use algorithmic execution to split orders, reduce visible market impact and manage execution across time and liquidity sources.

Execution tools can include:

• time-weighted order strategies
• liquidity-seeking algorithms
• limit-order logic
• multi-dealer price aggregation
• pre-trade transaction-cost estimates
• post-trade transaction cost analysis

Prime brokerage can give an institutional participant access to multiple execution counterparties while consolidating credit, settlement and reporting through a smaller number of relationships.

This infrastructure does not guarantee favourable execution. Institutions still face:

• spread and slippage risk
• counterparty risk
• settlement risk
• technology failures
• liquidity gaps
• model risk
• operational risk

What the infrastructure provides is the ability to measure, route and manage execution systematically at a scale that would otherwise be difficult.

Three Roles in One Market

When these factors are considered together, the institutional use of forex can be divided into three broad roles.

1. A potential return source

Institutional investors may use currency markets to implement:

• global macro views
• carry strategies
• relative-value positions
• systematic trend or momentum strategies
• cross-market arbitrage

Returns are uncertain, and each strategy introduces its own risks.

2. A risk-management instrument

Currency forwards, swaps, options and overlays can help manage unwanted exposure created by international assets, liabilities and business operations.

Hedging can reduce one form of risk while introducing costs, basis risk, liquidity requirements and counterparty exposure.

3. A structural diversification mechanism

Multi-currency portfolios can reduce excessive dependence on a single currency or jurisdiction. Certain active currency strategies may also produce return patterns that differ from traditional assets.

The benefit depends on implementation and is not guaranteed across all market environments.

What This Means for Individual Investors

Institutional participation in foreign exchange markets does not establish that forex trading is suitable for every individual investor.

Hedge funds and family offices may have access to:

• professional risk teams
• institutional pricing
• prime brokerage
• sophisticated execution technology
• multiple counterparties
• legal and compliance resources
• detailed portfolio-level analytics
• substantial capacity to absorb losses

Retail forex trading and copy trading operate under different conditions. An individual considering an automated or copied currency strategy should evaluate that specific strategy separately, including:

• live versus backtested results
• maximum drawdown
• leverage
• trading history
• open-position risk
• position sizing
• fees
• account structure
• execution differences
• withdrawal terms
• broker regulation
• whether performance claims can be independently checked

Independent checking is the practical part of that list: How to read a MyFXBook account explains what a public track record does and does not evidence, and Risk disclosure sets out the risks that apply to leveraged copy trading.

Institutional use of the FX market should not be used as proof that a retail trading strategy is safe, suitable or likely to be profitable.

Final Note

Foreign exchange markets play a permanent role in global finance because international investing inevitably creates currency exposure.

For hedge funds, family offices and other institutional investors, forex can function as a return source, a hedging instrument and a portfolio-management tool. Its scale, liquidity and flexibility make it useful, but those same characteristics do not remove leverage, market, execution or counterparty risk.

Sources and Methodology

This article draws primarily on institutional and official sources. Market statistics reflect the periods and methodologies stated by the original publishers. Institutional frameworks are presented as examples rather than universal recommendations.

1. Bank for International Settlements — OTC foreign exchange turnover in April 2025
2. BIS — Global FX trading hits $9.6 trillion per day
3. BIS — Sizing up carry trades in BIS statistics
4. BIS — Monetary policy transmission and currency carry trades
5. Mercer — Managing currency exposure in family office portfolios
6. UBS — Global Family Office Report 2026
7. Bank of England — Operation of monetary policy, July–September 1992
8. Parametric — Institutional currency overlay

Continue learning: Leverage explained, What is drawdown? and How to read a MyFXBook account — learn how to evaluate leverage, drawdown and verified trading history before considering an automated strategy.