Currency Managers Throw Out the Playbook as Trusted Models Fail

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  • Money managers seek to adapt their foreign-exchange strategies
  • Trend-following, carry, momentum don't prove profitable path

Currency managers battered by the failure of most major trading strategies this year are switching tactics.

Adnan Akant, who has more than 30 years of experience in foreign exchange, said his firm has reduced the size of its positions to react to, rather than anticipate, market surprises, while Robert Savage, a hedge-fund manager and former chief strategist at FX Concepts LLC, is looking for currencies that correlate with other assets such as oil and gold.

Investors have re-calibrated their currency bets this year as tumult in global equities and commodities has undermined technical strategies that rely on past trends to predict the future. Increasing concern that China’s financial turmoil will spill into economies around the world has driven currency volatility to a four-year high.

"Given China and oil are some of the biggest factors that affect everything and they’re somewhat non-transparent, it gives you very choppy markets where trends don’t last very long," said Akant, head of currencies in New York at Fischer Francis Trees & Watts Inc., which has about $38 billion under management. "It’s a difficult environment, no question about that."

Market Returns

The dollar, which benefited from forecasts for higher interest rates and almost two years of upward momentum, has depreciated against almost every major currency in the past month. The yen and the euro, traditionally spurned by investors for their negative returns on yields, have become top performers.

A Parker Global Strategies LLC index that tracks the performance of currency funds is little changed this year, following a 2.3 percent loss in 2015.

In momentum strategies, traders often use models that analyze historical patterns, such as moving averages and levels of support and resistance, for clues to whether a trade has run out of steam or has more room to go. The strategy has lost 0.3 percent this year, according to a model developed by Nomura Holdings Inc.

Another strategy that’s flopped is the carry trade, where speculators borrow in a currency they expect to depreciate or remain steady to secure the lowest borrowing costs, and in turn use the funds to buy higher-yielding currencies. The tactic was down 0.9 percent in 2016, according to Nomura data.

‘Challenging Landscape’

"Investors have a more challenging landscape because traditional strategies -- carry, momentum and value -- often tend to work best in a sustained-trend environment," said Richard Levich, a finance professor at New York University’s Stern School of Business with research interests in exchange-rate forecasting. "What we’ve had is a really choppy market, which has disrupted and upset some of the traditional trading models and caused a disparity of performance among managers."

Even with these headwinds, Paresh Upadhyaya of Pioneer Investments, which oversees more than $240 billion, is sticking to his convictions, wagering on a stronger dollar. Upadhyaya is betting the trend in higher U.S. interest rates compared with Europe and Japan will resume, leading the greenback to rally against the yen and the euro. 

The greenback is down 2 percent versus the euro and 5.7 percent against the yen in 2016. The dollar has suffered as futures traders are pricing in less than 50 percent probability that the Fed raises rates this year, based on the assumption that the effective fed funds rate will trade at the middle of the new FOMC target range after the next increase.

"The risk right now is so skewed to one extreme that the reward favors the pendulum swinging the other way," Upadhyaya said. "There’ll still be divergences in Group-of-Four monetary policies that’ll serve as major drivers behind a dollar bull market."

Savage, the chief executive officer of New York-based hedge fund CCTrack Solutions, said a way to maneuver through market turmoil is to take advantage of the increasing correlation in currencies with equities and commodities. His firm is bullish on South Africa’s rand, as lower oil import prices and gold’s rally bolsters the nation’s equities and economic outlook.

"Our trend models worked very well in January, and they stopped working in February," Savage said.