Hedge Funds Revel in Volatility as Gains Tag Along

After posting three straight years of losses that thinned the ranks of hedge funds specializing in currencies, the foreign-exchange market is showing signs of rebounding.

Parker Global Strategies LLC’s index of leading currency funds climbed 0.9 percent in August, the most since January 2013 and trimming losses in 2014 to 2.2 percent. That followed a 0.3 percent gain in July, the first consecutive advances since October, as diverging policies among central banks create wider price swings for investors to exploit.

The gains are providing comfort after almost six years of near-zero benchmark interest rates suppressed volatility and cut returns. Assets managed by funds focused on foreign exchange shrank 6.4 percent in the first half of 2014 to $18.4 billion, after a 20 percent drop last year when firms such as FX Concepts LLC, once the world’s biggest currency hedge fund, closed down, according to data compiled by Hedge Fund Research Inc.

“Things are better,” Robert Savage, the chief executive officer of hedge fund CCTrack Solutions and former chief strategist at FX Concepts, said by phone from New York on Aug.

28. “To say August is the turning point will be a bit of a stretch, but there are ways to make money.”

Volatility Rises

The Parker index finished last month at 124.22, after falling to as low as 122.46 on Aug. 8 from 127 at the end of

2013. It peaked at 139.60 in October 2010.

Volatility is crucial for returns. JPMorgan Chase & Co.’s gauge of the outlook for global exchange-rate swings rose to a three-month high of 6.48 percent yesterday amid concern over tensions in Ukraine and Gaza. While that’s still below an average of 10.4 percent during the past decade, the gauge is up from a record low on a closing basis of 5.29 percent in July.

Splits in policy among central bankers in the U.S., euro zone, U.K. and Japan are becoming more pronounced, setting their currencies on diverging paths. LNG Capital, a London-based investment manager, started a currency fund in July, saying “differing global macroeconomic environments” are creating opportunities.

The euro tumbled to a one-year low of $1.3110 yesterday, less than two weeks after European Central Bank president Mario Draghi signaled he is prepared to inject more stimulus in the region’s economy to avoid deflation. Large speculators had a net 150,657 contracts in the futures market on Aug. 26, the most since 2012, betting the euro will fall further, according to Washington-based Commodity Futures Trading Commission data.

Dollar Soars

The Bloomberg Dollar Spot Index, which tracks the greenback against 10 other major currencies, climbed to the highest level since January before trading at 1,032.36 at 12:17 p.m. in New York, as data from housing to jobless claims suggest the economy is improving. Traders see a greater than 50 percent chance that the Fed will raise as soon as July its target interest rate from a range of zero to 0.25 percent, where it has been since December 2008, according to federal funds futures data compiled by Bloomberg.

The Bank of England is also considering increasing borrowing costs, while the Bank of Japan has signaled that more easing is possible if the inflation rate falls too low.

“One of the problems over the last couple of years was that markets were moving too much in tandem with each other, dominated by one single factor, in a ‘super herd’ mentality,” Andre Honig, executive director at Transtrend BV, said during a telephone interview on Aug. 25. “That ‘super herd’ behavior has started to fade.”

Losing Trend

Transtrend, a $5.8 billion Rotterdam-based managed futures fund established in 1991, jumped 2.7 percent this year through July in the U.S. dollar subset of its Diversified Trend Program. While bets on the rates and agricultural markets contributed the most to the gains, it also profited from trades in emerging-market currencies including the Brazilian real, Honig said.

Many funds couldn’t wait for better days. The Parker Global index, which measures the 14 funds deemed as the most elite of their class, is still poised for its fourth consecutive annual decline, losing 10 percent since 2010.

QFS Asset Management LP, the Greenwich, Connecticut-based hedge fund, closed its currency program and returned almost $1 billion to clients in January, citing lack of opportunities. FX Concepts, which oversaw $14 billion at its peak, filed for bankruptcy in October amid losses and investors’ withdrawal.

“I definitely see frustration,” Jim Holtzman of Legend Financial Advisors in Pittsburgh, who has recommended his clients reduce their investments in currencies, said by phone. “Currency funds cannot get any traction.”

Christopher Cruden, the chief executive officer at Insch Capital Management, which relies on computer models to bet on currency moves, said he’s still sticking to the strategies even after his leveraged fund lost 13 percent net of fees this year through August. It would be the fund’s third annual decline since its inception in 2000.

“This year has been bad,” Cruden said Sept. 2 by phone from Lugano, Switzerland. “They say that every dog has its day. We are overdue for a reversal of fortune.”

(An earlier version of the story was corrected to fix a typographical error in the chart.)