Currency funds see worst year since 2011 as divergence flounders
INVESTORS PREPARING FOR THE
FED’S FIRST RATE INCREASE SINCE 2006 WERE BLINDSIDED WHEN THE CENTRAL
BANK INSTEAD DOWNGRADED ITS PREDICTIONS FOR US GROWTH AND INFLATION IN MARCH, SPARKING A SELLOFF IN THE DOLLAR AS HEDGE FUNDS AND OTHER LARGE SPECULATIONS CUT NEAR-RECORD WAGERS
ON ITS STRENGTH.
were blindsided when the central bank instead downgraded its predictions for US growth and inflation in March, sparking a sell-off in the dollar as hedge funds and other large speculations cut near-record wagers on its strength. Reluctance to return to that trade as the Fed shunned a rate increase in both June and September fuelled a search for yield elsewhere, with investors borrowing in countries with low interest rates to invest in higher-yielding currencies. These so-called carry trades imploded as oil, a core export for developing economies, fell to the lowest in more than a decade.
Traders who used the yen to buy its 16 major peers lost money on 14 of those trades during the past 12 months. Eighteen of 22 emerging-market currencies used for carry trades failed to profit versus the Japanese currency over the same period.
“People have made money in the past with that strategy and they probably thought that the Fed wasn’t going to be so aggressively hiking,” said Manuel Mejia-aoun, chief investment officer at Alpha4x Asset Management LLC, whose fund gained more than 15 per cent in the year through November, according to fund tracker Barclayhedge’s estimates. “The problem is that when a currency moves 1 per cent a day, it’s very difficult to make money.”
New York-based Alpha4x’s Capital Growth Fund profited from bets against high-yielders such as the Brazilian real, South African rand and Turkish lira, Mejia-aoun said. Volatility erased shortterm gains for those who took the other side of those transactions.
Currency-price swings averaged more in 2015 than in any of the previous three years, a Jpmorgan Chase & Co. gauge of global currency volatility shows. Price swings were at their most severe surrounding central bank decisions, such as the Swiss National Bank removing the franc’s peg to the euro, China devaluing the yuan, and the Fed debating higher rates.
“What you’re seeing is volatility really spike up for these events, and everything else is just quiet and no one wants to invest,” said Peter Gorra, head of foreign-exchange trading in New York at BNP Paribas SA.
Steering clear of the worst effects of that volatility was crucial to managers’ success, with strategies that relied on momentum or valuation both returning a profit. Investors that identified and followed trends booked a 4.3 per cent gain in 2015, while those who bought currencies with the lowest purchasing power made 2.7 per cent, according to Deutsche Bank indexes.
For carry aficionados, there’s always next year. With the Fed planning to raise borrowing costs as many as four times in 2016, yield differentials and the carry trade will remain in focus, according to Harmonic Capital Partners, which managed more than $1.6 billion of assets as of the end of August.
“You’re starting to see more potential for yield divergence than we’ve seen over recent years, so that’s brought people back into considering carry as a trading strategy, but in 2015 was probably too early,” said Samir Sheldenkar, an investment partner at the London-based hedge fund. “If you are able to pick up on those divergences, I think it should be actually a good environment for trading foreign exchange.”