Starting a FX hedge fund in 2020

The following article was written by Natallia Hunik.

The coronavirus crisis has made investors around the globe scrambling to figure out how to re-distribute their portfolios to minimize losses and diversify their investments.

During the pandemic, the financial market saw unprecedented events including:

  • The biggest ever US Fed Reserve intervention in history in March and after that the biggest ever fiscal stimulus package.
  • Inverse correlation between stocks and bonds in March that broke the parity trade strategy. In the early March, the weekly correlation between the S&P 500 and 10-year Treasury bonds was minus 0.84, the lowest since early 2015, Goldman Sachs Group Inc. estimated.
  • In March, global stocks saw a downturn of at least 25% during the crash and 30% in most G20 nations.
  • Oil prices on WTI futures contract turned negative on 20 April 2020.

Traditionally, this type of high volatility environment is good for the hedge funds as they are better positioned to take advantage of disruptions in the markets. Recent market statistics shows that when the coronavirus pandemics halted the global economy in March 2020, hedge funds outperformed the market Although performance greatly difference depending on the type fund, managed futures funds showing the best results.

Hedge funds originated in the speculation in international currency markets but are now very active in stock markets, making them behave like currency in the sense of making them into vehicles for speculation rather than investment.

The FX market have disappointed investors since the 2008 financial crisis with the world’s biggest central banks launching stimulus programs. The monetary policies reduced volatility in currency markets which robbed fund managers from the volatility they need to deliver performance and funds specializing in currency started to wind down.

During the coronavirus pandemic, the global stocks saw at least a 25% downturn in March 2020 and 30% in most G20 nations ending the longest economic expansion and longest bull market in US history. These disruptions and the oil crisis in addition, affected the currencies market as well, causing massive swings.

Experts say that the pandemic will change and cause major shifts in financial market, as well as affect the roles and impact of institutions such as WHO, EU, IMF and others.

FX hedge fund

The economic impact and shock will be felt across the markets for some time. FX volatility will be present as an economic effect and ultimately manifest itself in fluctuating currency rates.

There are a few regulatory frameworks that were launched in the last five years that anyone who want to establish an FX Fund in 2020 can take advantage of. The frameworks allow investment management funds launch in top jurisdiction with fast lead time, reasonable capital requirements and light regulatory regime.

Setting up a FX investment fund may face challenges like locating reliable FX prime brokerage service as the amount of required capital has risen, the admission criteria has become titer and the fees have increased as well.

“Prime of Prime” can solve that as it allows for faster currency markets access and offers accelerated time-to-market as funds can tap into existing well-functioning infrastructures.

The global economy crisis caused by the coronavirus pandemic will inevitably motivate a growing number of hedge funds to leverage currency trading to their advantage. It will also drive an increased need for the ability to hedge currency exposure among private equity firms that are heavily exposed to volatile emerging markets economies.

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