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Turbulent markets jolt currency hedge funds from decade-long slumber

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LONDON (Reuters) – Veteran hedge fund manager John Taylor said of one of Gary Larson’s favorite cartoons, a vulture sitting on an animal carcass is more like a descending vulture. explains that he is saying this to It’s the best of times.”

He jokingly says it’s akin to the hedge funds currently circling the forex market, saying that the sudden rise in volatility has pushed many out of the sector for the few who survived a decade-long period of calm. Boost returns for professional investors.

Taylor’s previous company, FX Concepts, rode the market volatility of the financial crisis and had its best year in 2008, with over $14 billion in assets under management, making it the world’s largest currency hedge fund at the time.

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But post-financial-crisis central bank quantitative easing and the spillover of developed-market interest rates just above zero have pulled nearly $7 trillion a day from the global currency market to the kind of money that hedge funds would thrive on. Lost the flow.

The so-called “carry trade,” in which investors borrow a low-yielding currency and sell it to buy a high-yielding currency, has been wiped out and ultimately the end of many specialty funds, including FX Concepts. rice field. 35 years.

Now, decades of high inflation are again forcing central banks to raise interest rates aggressively.

The U.S. dollar surged to a 20-year high and the yen hit a 32-year low as the U.S. Federal Reserve (Fed) spearheaded tightening policies, in contrast to the Bank of Japan’s ultra-accommodative policy. holding firm, the pound plummeted to record lows for the government. The promise of unfunded tax cuts has made investors uneasy.

Volatility is back and with it currency funds haven’t performed in years.

Deutsche Bank’s currency volatility index is up more than 100% so far this year, and the Barclays Hedge Index, which tracks the performance of currency hedge funds, rose 5.71% in the first half, its best year since 2003.

Similarly, the HFR’s HFRI 500 Currency Index, which tracks these funds, rose 8.29%, its best performance since 2007 and well ahead of the broader hedge fund index’s 3.8% rise.

Unable to resist the opportunities presented by the new inflationary environment, Mr. Taylor, 78, pulled out of his investment retirement and sought the funds needed to start a new hedge fund, typically $100 million to $150 million. $) to raise money.

He said the trigger was hearing Fed Chairman Jerome Powell talk about inflation and markets.

“No one can completely control the market. The market goes anywhere. If he thinks he can[stop inflation and control the market]he will make a mistake.”

Big players like Brevan Howard, whose currency funds fell victim to the market after the financial crisis, are also increasing their focus on foreign exchange. His BH Macro, the company’s publicly traded fund, has more than tripled his FX exposure over the past year, up 18% at the end of August, according to a recent shareholder report. Brevan Howard declined to comment.

Results for half a year since 1987

Once bitten, twice shy?

Years of low volatility have screened existing currency hedge funds and discouraged the creation of new hedge funds, a process that typically takes seven to eight months.

According to BarclayHedge, fund liquidations and consolidations over the past four years have far outpaced their inception, with no new currency-focused hedge funds launching this year.

As of September 2022, no new funds have been launched

Some stuck it out. BarclayHedge believes there are 85-110 such funds today, up from 450-550 ten years ago. However, they have $1.3 trillion in assets under management, the largest amount deposited in the Monetary Fund by pension funds, asset managers, and asset managers since records began in 1990.

Still, currency trading is difficult, says Leslie Hill, CEO of Record Financial Group.

Overseeing $83.1 billion in assets, Record has grown into the world’s largest currency specialist by hedging the currency risk of asset managers’ more traditional portfolios with unique trading strategies.

It has a $4.5 billion currency fund and a $4.40 multi-asset fund, according to recent public disclosures.

“Living on currency as a return, not just low-fee, high-risk hedging, is putting many currency managers out of business,” Hill said.

Adrian Lee, who founded Adrian Lee & Partners in 1999 and manages about $17 billion concurrently deployed as a hedge fund and currency risk management, believes conditions remain favorable for currency managers.

“In the last 10 years as a currency manager, when you suggested adding 2% upside to a portfolio of people earning 15% in stocks, you never looked,” he said. Told. “Right now, the equity portion of the portfolio is empty-handed and losing money.”

Lee’s return this year is approaching 20%, said a source who could not be identified because of financial regulations.

Taylor believes the influx of speculators could spur a rebound in volatility, but the recession has caused new strains across stocks, some bonds and currency markets, whether hedge funds or not. It claims that it will bring a very low price.

The market reflects a baked-in cyclical rhythm, and traders are there to ride the wave, he said.

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Reported by Nell Mackenzie.Edited by Kirsten Donovan

Our criteria: Thomson Reuters Trust Principles.

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