- Fund benefited from wagers on stronger dollar, yen and yuan
- Dymon keeps bets on weaker pound after 4% Brexit day gain
A top-performing hedge fund is sticking with wagers on a stronger yen and a weaker pound after the positions paid off following the U.K. referendum to leave the European Union.
The Dymon Asia Currency Value Fund jumped an estimated 4 percent on the day the Brexit vote result was announced, and has gained 13 percent in the first half of this year for investors using less leverage, according to Gerald Chan, head of distribution for Dymon Asia Capital (Singapore) Pte. Fund investors willing to amplify bets through the use of borrowed money saw a 35 percent return in the six months, he said.
The fund, which oversees $425 million including leverage, has outperformed peers as many of the world’s biggest investors have been caught off-guard by jolts including government and central bank interventions and political events such as the Brexit vote. Macro funds, which trade in the currency, stock, bond and commodity markets, have been stymied by abrupt reversals of trends and exaggerated market swings.
Macro hedge funds managed by Brevan Howard Asset Management, Discovery Capital Management and Omni Partners are among those that have posted losses this year. The Eurekahedge Macro Hedge Fund Index edged up 0.4 percent in the first half of the year, according to preliminary data.
The U.S. is the best performer among major economies and investors will continue to flock to safe assets such as the dollar and gold in the event of a global economic meltdown, Chan said, while the yen will benefit as there isn’t much room for Bank of Japan to expand easing measures.
"One of our core themes is to be long the dollar, gold and yen against a basket of short developed Asian currencies such as the Korean won, Taiwan dollar and Singapore dollar,” Chan said, as the managers expect the Asian currencies to be hurt by a gradual depreciation in the yuan. The fund is also short commodity-related currencies like the Australian and New Zealand dollars, as well as the pound.
The fund took a bearish bet on the pound against the dollar in the lead-up to the Brexit vote. Dymon fund managers believed the campaign to exit the EU had a 50 percent chance of winning in the referendum, while the markets were pricing in a 90 percent probability of the remain camp prevailing, said Chan.
The Dymon fund bought and has kept options against sterling, allowing it to profit from the Brexit win, said Chan. Dymon believes the Brexit vote would lead to capital outflows and postponement of investments into the U.K. because of near-term uncertainties. The country will see an interest rate cut by mid-July and a fall in the pound’s exchange rate to $1.25 per dollar, he said. The pound touched a 31-year low of $1.2798 last week as property funds froze redemptions, echoing the real-estate tremors at the start of the 2008 financial crisis.
Bets that the Chinese currency would strengthen were the biggest contributor toward the fund’s first-half return, according to Chan. It started the year owning options on the expectation of the yuan depreciating in the offshore market. It reversed the trade in the first quarter after changes in China’s currency-fixing mechanism convinced Dymon’s managers that the government would defend the yuan at all costs when U.S. hedge funds were betting on a collapse of the currency, Chan said. Since the end of the first quarter, Dymon’s managers have been negative on the prospects on the yuan.
The fund’s bet on gold prices to rise amid government easing and a growing negative interest-rate environment was also a strong contributor toward the first-half return, according to Chan. The fund increased the bet after the Brexit vote, anticipating that governments worldwide may be compelled to continue easing monetary policies and investors would seek to protect their wealth with the metal amid global uncertainties, he said.
Wagers on the Australian dollar to depreciate against the greenback and yen were also a profit contributor, the firm said. Dymon went bearish on the Australian dollar after the country surprised the market by posting a 0.2 percent consumer price index decline from the previous quarter in late April, leading its central bank to cut interest rates in May.
By contrast, the Bank of Japan’s surprise announcement of a negative interest-rate strategy in late January triggered a plunge in stocks and the yen, Chan said. The fund bought profitable options that bet on the markets underestimating the odds of the Australian rate cut and the BOJ’s restraint from further easing at the end of April, he added.
Danny Yong, a former Goldman Sachs Group Inc. and Citadel trader, started Dymon Asia Macro Fund with $113 million in 2008 with billionaire-investor Paul Tudor Jones’s Tudor Investment Corp. as his first outside backer. Assets of his Singapore-based firm have since grown to nearly $5 billion. The $3 billion flagship fund gained 2 percent in the first half, helped by a 1.5 percent profit spurred by Brexit, said Chan.
The Dymon currency fund makes more concentrated investments for clients that desire higher returns and can accept more risks. The more leveraged share class, started in May 2011, has returned nearly 180 percent since inception, according to Chan. It continues to see net inflows, he said, without giving numbers.