Even Brexit Can’t Save Currency Funds on Worst Streak Since 2013

  • FX-focused hedge funds fall for fourth-straight month
  • Bets sour as U.S. rate-hike odds evaporate, yen rallies

It was another rough month for currency-focused hedge funds.

A gauge of returns in the $5.3-trillion-a-day foreign-exchange market extended its longest losing streak in almost three years as traders fail to capitalize on volatility that’s surged to the highest since 2011. Even Britain’s shock decision to exit the European Union -- which fueled the the biggest one-day gain for speculators in 10 months -- couldn’t salvage a June marred by misplaced bets on Bank of Japan stimulus and the pace of Federal Reserve policy tightening. The Parker Global Currency Manager Index fell 0.5 percent, its fourth-straight monthly decline.

While higher volatility creates opportunities, sudden or unexpected jolts make it harder for traders to capitalize on trends. With political paralysis in the U.K. looming over the EU and the U.S. presidential election fast approaching, currency managers may find it difficult to navigate the remainder of the year.

“Hedge funds do not typically do well in zig-zag markets -- they are good in capturing trends, but not zig-zags,” Nikolaos Panigirtzoglou, global market strategist in the multi-asset allocation team of JPMorgan Chase & Co., said by e-mail from London. "I don’t think a post-Brexit environment will be easier for them -- look how vicious the reversal was over the past few days.”

For a QuickTake explainer on why Britain is Quitting the EU, click here.

There’s been no shortage of surprises to catch currency traders off guard this year. The Bank of Japan shocked markets when it adopt negative interest rates in January, a week after Governor Haruhiko Kuroda said they weren’t being considered. The yen plunged after the announcement before erasing those losses days later.

Last month’s U.S. payrolls report, which showed U.S. employers added the fewest workers in almost six years in May, sent the greenback plunging by the most in six months versus the euro as investors pared bets the Fed was on the brink of raising interest rates.

Money managers were able to take advantage of the lead up time to the U.K. vote to boost net bearish positions on the pound before the referendum. Bets that the currency would fall outnumbered bullish positions by 66,299 contracts in the week to June 7, the most in three years, according to data from the U.S. Commodity Futures Trading Commission. 

P/E Investments’s $4.4 billion currency hedge fund, co-founded by Warren Naphtal, gained about 10 percent on Britain’s decision to leave the European Union, mostly from betting against the euro, according to a person with knowledge of the matter.

Volatility Surges

The dollar has fallen 2.1 percent against the euro in 2016 to trade at $1.1146 as of 12:18 p.m. in New York. That’s upended analysts’ projections from the beginning of the year that called for the U.S. currency to strengthen to $1.04 per euro by the end of June. The greenback was forecast to rally to 124 yen by mid-year. Instead, it’s declined 14 percent to 102.55 yen.

“Investors have generally wound in the dollar-bullish consensus trade to an extent through the quarter as the Fed outlook has become muddied,” said Shaun Osborne, chief foreign-exchange strategist at Bank of Nova Scotia.

Returns have fallen even as average foreign-exchange volatility surged this year to the most since 2011, a JPMorgan measure showed. In Group-of-seven economies, currency swings jumped to a four-and-a-half-year high in June.

Further central-bank policy surprises, risks to Chinese economic growth and political uncertainty will keep many currency managers cautious for the remainder of 2016, said Vincent Reinhart, chief economist at Standish Mellon Asset Management in New York, which manages $157.3 billion.

“The possibility of marked, adverse outcomes -- tail risk -- limits conviction,” Reinhart said.

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