Sat, Feb 24, 2018
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

Best gains in five years cannot help Forex hedge funds in 2011

Tuesday, June 14, 2011
Opalesque Industry Update - Forex hedge funds strategies posted strong performance in April as the HFN FX Index rose +2.36% during the month (+1.76% YTD) compared to +3.07% YTD for equity hedge fund strategies, +3.59% for fixed income strategies and +2.78% for the broad hedge fund industry.

Analyzing more than 200 unique fund products that have a primary investment strategy focused on foreign exchange markets, the HFN Strategy Focus Report – Foreign Exchange Strategies, showed that that total hedge fund assets invested in FX strategies were $51.6bn at the end of Q1 2011.

However, early data from May is showing early indications that the group lost most, if not all of April’s gains.

“Performance from FX strategies in April and May indicate the aggregated positions from the group were negative on the U.S. dollar. The correlation of monthly returns of FX strategies to a U.S. dollar vs. basket of currencies index in the last two years was -0.62. However within the FX universe there is a diversity of strategies which make the aggregation of return streams an opaque image of individual success and failure,” the report stated.

Going forward
As a general rule for the whole hedge fund industry, investors chase returns. A study by HFN showed that investors tend to get rewarded for chasing returns and rewarded for redeeming from funds which underperformed, at least in the years following the financial crisis. The first part of the trend holds true for FX strategies.

Funds reporting full asset streams to HFN which had negative returns in 2010 have had an average of $19m redeemed in the last nine months and an average of $4m in 2011.

Those that outperformed the hedge fund industry in 2010 had average net inflows of $26.1m in the last nine months and $10m in 2011. Investors have appeared to make decent decisions as well. The bottom group is -0.12% in 2011 while the top group is +3.73%.

The above figures do not speak well for FX strategies as a whole. Given the relatively poor aggregated performance in 2011 (only one-third of FX funds have outperformed the industry in 2011 through April, a figure which will likely shrink in May) the strategy will likely continue to reduce in size with money flowing to a select group.

FX fund characteristics
The majority of forex hedge funds are located in the U.S., especially in New York, Chicago and Boston. But London remains the most common city in which FX strategies base their operations.

On the average, FX strategies run $228.5m in assets, compared to the average equity strategy size of $201.2m and average fixed income strategy size of $443.5m. The majority of the current crop of FX and credit funds were launched in 2008 while equity fund launches peaked in late 2006 and 2007.

More importantly, the study found that London and the rest of Europe have a higher concentration of quantitative based FX strategies while in the U.S., Boston and Chicago have more discretionary based strategies than New York.

Performance by size
Returns by strategy assets differ slightly. FX entities appear to have a higher concentration of managed accounts and so actual fund size may not be the best indication of the size of an FX operation. The study concluded the following based on performance by size and strategy:

  • Smaller FX funds had a slightly higher median return than larger funds, yet larger funds ( more than $100m) had meaningfully higher top percentile returns.
  • Large FX strategies (by “assets in strategy”) have performed relatively well in the last twelve months and YTD 2011.
  • The FX entities, by strategy AUM, with greater than $1bn returned an average of +16.45% in the LTM and +5.47% in 2011; both above the broad hedge fund industry aggregated returns.
  • Based on the multi-sector funds that utilize FX strategies either primarily or secondarily, it appears that FX strategy exposure in general has been a drag on performance.
  • In recent terms, there has not been a meaningful difference between quantitative and discretionary FX strategies, but over the longer term, funds which allow for a discretionary influence have done better.

Precy Dumlao

Bg

What do you think?

   Use "anonymous" as my name    |   Alert me via email on new comments   |   
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing

 



  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Art & Motion launches collectible car alternative investment vehicle[more]

    Komfie Manalo, Opalesque Asia: Luxembourg-based Art & Motion has launched a new investment vehicle dedicated to vintage cars and exceptional high-quality vehicles as this collectible market has grown exponentially the turn of the centu

  2. Opalesque Exclusive: Global Sigma captures February's long-vol trade[more]

    Bailey McCann, Opalesque New York for New Managers: Florida-based Global Sigma rode February's volatility to new highs. The firm's AGSF strategy is up +2.8 percent through February 16 and +4.2 percent YTD a

  3. Institutional Investors - Hedge funds regain their appeal for a $57 billion asset manager, Private credit strategies in stratosphere[more]

    Hedge funds regain their appeal for a $57 billion asset manager From Bloomberg.com: With volatility back on the radar, one of the Nordic region's biggest asset managers is considering relying a bit more on hedge funds to help oversee his portfolio. Mikko Mursula, the chief investment off

  4. Investing - All aboard for hedge funds as trade tide lifts shipping, Hedge funds pile into Time Warner in bet on merger success[more]

    All aboard for hedge funds as trade tide lifts shipping From Reuters.com: Forced to abandon ship after mistiming their investments five years ago, hedge funds are venturing back in a bid to profit from growing global trade flows. Around 90 percent of traded goods by volume are tran

  5. Investing - Hedge funds turn short on tech just as stock rally takes off, After biggest short, speculators slash bearish US bond bets as supply deluge looms[more]

    Hedge funds turn short on tech just as stock rally takes off From Newsmax.com: A key group of investors has just missed out on the biggest tech-stock rally since 2014. Hedge funds and other large speculators turned net short on Nasdaq 100 Index futures for the first time in 21 months, ac