Alpha Macro FX Traders Should've Just Been Beta

Updated on
  • Returns adjusted for risk are negative in 2017: Deutsche Bank
  • Discretionary managers failing to anticipate economic shifts

Macro investors seeking to beat basic currency strategies are having a horrible year.

Discretionary fund managers targeting returns above what they’d get with simpler approaches such as carry, momentum and valuation trades, are heading for their worst year since at least 1989, according to a reward-to-risk metric from Deutsche Bank AG.

Bets on shifts in the economic cycle have gone bust as they failed to anticipate key trends, such as slow U.S. inflation, the German bank said in a research report published Wednesday.

Discretionary money managers have flexibility to invest as they wish, and are battling passive funds and computer-driven traders for outperformance and inflows across asset classes. Their meek currency performance this year won’t help their case. The rolling two-year Sharpe ratio for traders wagering on economic cycles, a measure of excess returns relative to volatility, is now firmly in negative territory.

Meanwhile, the beta -- the return posted by a simple carry, valuation and momentum portfolio -- remains positive, and within normal ranges, according to Deutsche Bank.

That dynamic suggests discretionary macro managers seeking alpha, or excess returns, have never fared this badly relative to the market trend, according to the German bank, which is ranked the world’s fifth-largest currency trader by Euromoney Institutional Investor Plc.

Deutsche Bank AG

“Traditionally, currency managers’ returns tend to correlate quite well with beta-style strategies like trend, value and carry,” says Saeed Amen, founder of macro advisory firm Cuemacro Ltd. The data “suggest FX managers have likely missed out on some of the big moves this year, which would have picked up by some of the trend-following strategies, such as the short-dollar trade.”

The greenback’s unexpected drop in trade-weighted terms this year has reshaped the landscape for macro investors across the world.

So while there’s been good money to be made in foreign-exchange investing, this breed of currency trader may have done better by just following the herd.

“The upside of discretionary investing is that it is more forward-looking than cycle-agnostic ‘beta,”’ George Saravelos, the global co-head of FX research at Deutsche Bank, wrote in a note. “The downside is that when the forward-looking view is wrong, the cost can be greater.”

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