I would like to assess the performance of currency traders so I was wondering if there is a broad currency index that can be used as a benchmark to assess the performance of these traders. The index would represent a passive investment strategy in currencies.
I think you're better off identifying the strategy they are using and try to find an index that matches.
However the Dollar Index shows dollar performance with respect to a basket of 6 currencies - perhaps of some use USD is your base currency.
In general, no such index exists as where with stocks you are just holding most of the major players with currencies you are always making a long/short bet. A common EUR futures position, for instance, is really a long EUR/short USD bet.
Still if your managers are USD denominated holding (long-only) a basket of foreign currencies the already mentioned Dollar Index or perhaps better the Fed's Broad Trade Weighted Dollar index might be better. Be very careful, however, using these as you would the sp500 for a large-cap stock trader unless your managers are long foreign only and reasonably broad.
You can also compare your managers to an index of currency managers, but peer benchmarking often adds more problems than it solves.
The CFA Institute has a wonderful write-up on the problems of currency benchmarks. The simple and common solution I've seen is to just treat them as absolute return managers and look at statistics such as the volatility, draw-down, Sharpe ratio ect..
Assessing traders performance in that context is I believe quite similar to assessing Hedge Fund's performances (especially market-neutral): there is no obvious direct index for this, and it will always be tougher than for long-only equity funds obviously.
However, I did use an index called HFRX Macro: Currency Index, which is basciallyl an aggregate of different HF performances using FX strategies.
Here is the official description (sorry the output is not great but I copied it from the official website and it's not better there):
Currency Index include both discretionary and systematic currency strategies. Systematic Currency strategies have investment processes typically as function of mathematical, algorithmic and technical models, with little or no influence of individuals over the portfolio positioning. Strategies which employ an investment process designed to identify opportunities in markets exhibiting trending or momentum characteristics across currency assets classes, frequently with related ancillary exposure in sovereign fixed income. Strategies typically employ quantitative process which focus on statistically robust or technical patterns in the return series of the asset, and typically focus on highly liquid instruments and maintain shorter holding periods than either discretionary or mean reverting strategies. Although some strategies seek to employ counter trend models, strategies benefit most from an environment characterized by persistent, discernible trending behavior. Systematic Currency strategies typically would expect to have greater than 35% of portfolio in dedicated currency exposure over a given market cycle. Discretionary Currency strategies are reliant on the fundamental evaluation of market data, relationships and influences as they pertain primarily to currency markets including positions in global foreign exchange markets, both listed and unlisted, and as interpreted by an individual or group of individuals who make decisions on portfolio positions; strategies employ an investment process most heavily influenced by top down analysis of macroeconomic variables. Portfolio positions typically are predicated on the evolution of investment themes the Manager expect to materialize over a relevant timeframe, which in many cases contain contrarian or volatility focused components. Investment Managers also may trade actively in developed and emerging markets, focusing on both absolute and relative levels on equity markets, interest rates/fixed income markets, currency; frequently employing spread trades to isolate a differential between instrument identified by the Investment Manager to be inconsistent with expected value. Discretionary Currency strategies typically would expect to have greater than 35% of portfolio in dedicated currency exposure over a given market cycle.
Hedge Fund Research, Inc. (HFR) utilizes a UCITSIII compliant methodology to construct the HFRX Hedge Fund Indices. The methodology is based on defined and predetermined rules and objective criteria to select and rebalance components to maximize representation of the Hedge Fund Universe. HFRX Indices utilize state-of-the-art quantitative techniques and analysis; multi-level screening, cluster analysis, Monte-Carlo simulations and optimization techniques ensure that each Index is a pure representation of its corresponding investment focus. Full strategy and regional descriptions (multi-language), as well as the full "HFRX Hedge Fund Indices Defined Formulaic Methodology" may be downloaded here.