Hedge funds welcome volatility as gains show positive signs – currency fund index climbed 0.9 in August

Bloomberg is reporting that Parker Global Strategies LLC’s index of leading currency funds climbed 0.9% in August, the most since January 2013 and trimming losses in 2014 to 2.2%. That followed a 0.3% gain in July, the first consecutive advance since October, as diverging policies among central banks create a bit wider price swings for investors to anticipate, hedge and speculate on.

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 Forex shrank 6.4% in the first half of 2014 to $18.4 billion, after a 20% drop last year when firms such as FX Concepts LLC, once the world’s biggest currency hedge fund shutdown, the fund once with $14B AUM ended with just $2M under management and $79M in liabilities.

“Things are better,” Robert Savage, the chief executive officer of hedge fund CCTrack Solutions and former chief strategist at FX Concepts, said by phone to Bloomberg from New York on Aug. 28th. “To say August is the turning point will be a bit of a stretch, but there are ways to make money.”

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, who started a currency fund in July, stated “differing global macroeconomic environments” are creating opportunities.

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.

What caused volatility to creep up in August for the FX industry? The Bloomberg Dollar Spot Index, which tracks the greenback against 10 other major currencies, climbed to 1,035.06 on Wednesday September 3rd, the highest level since January, as data from housing and manufacturing to jobless claims suggest the economy is improving. Traders see a greater than 50% chance that the Fed will raise as soon as July 2015 its target interest rate from a range of zero to 0.25%, where it has been stuck since December 2008, according to federal funds futures data compiled by Bloomberg.

transtrend_logoMoreover, as far as large successful managed funds go Transtrend, a $5.8 billion Rotterdam-based managed futures fund established in 1991, jumped 2.7% 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.

However, many funds couldn’t wait for better days such as the aforementioned FX Concepts. 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 in 2014, losing 10% 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.

“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% 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.”

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