Currency Funds Falter as Policies Shift; “All the old models that said currencies should do X if Y happens are not working.”

Updated May 10, 2013, 9:40 p.m. ET

Currency Funds Falter as Policies Shift

By MATTHEW WALTER

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Foreign-exchange funds suffered their worst performance in 10 months in April, as currency managers struggled with a market frequently swayed by central-bank policies. The Parker Global Currency Managers index, which tracks the performance of funds in which the firm invests, fell 1.14% last month. The decline left the index up just 0.57% in the first four months of the year. Even as the easy monetary policies at major central banks have fueled a bumper year for investors in a broad range of assets, from Japanese stocks to European bonds, funds that mainly invest in currencies have underperformed, and there are signs that their clients are losing patience. Investors pulled $1.5 billion from currency funds in the first three months of 2013, even as they piled into hedge funds as a whole at their fastest clip in almost three years, according to Hedge Fund Research Inc. Foreign-exchange funds had $14.4 billion under management in March, down 58% from their peak in 2007. Investors and analysts say the outflows from currency funds are a sign that large asset managers are skeptical that financial markets have truly found their footing. Currency funds proved especially vulnerable when central banks stepped into the market to stimulate growth and calm panics, often with measures that involved printing money or deliberately weakening exchange rates. Investors say they see no sign that central banks are relaxing in their new role policing markets.There is also evidence that some currency managers themselves are deciding to leave the business. Managers of Axiom Investment Advisors, led by Ephraim Gildor, on April 23 told investors the fund would shut down and return money to investors because of concern about the performance of its investing model. The fund, which specialized in trading currencies, managed about $900 million as of late 2012, an investor said. Mr. Gildor declined to comment.

“A lot of currency traders have learned their craft over the previous 25-year period” before central banks became so active in financial markets, said Stephen Jury, head of currencies and commodities at JP Morgan Private Bank, which advises on $909 billion in assets for wealthy investors. “They haven’t really been able to figure it out. All the old models that said currencies should do X if Y happens are not working.”

Mr. Jury said many of his clients are based in the U.S. and want to invest in other currencies to hedge against a potential decline in the dollar. But they aren’t impressed with the performance of currency funds.

The poor performance in April followed what appeared to be a promising start to the year. The Parker Global index’s gain from January to March was its best first-quarter showing in five years. Many fund managers said they benefited from the yen’s 26% slide since early November, which provided ample opportunities to put on lucrative trades. After stalling for most of April, the yen resumed its weakening trend in May, falling below ¥100 to the dollar for the first time in four years on Thursday.

Momtchil Pojarliev, a senior portfolio manager at currency fund Hathersage Capital Management, said currency-trading strategies are starting to work again. His firm’s main FX program saw a strong 7.51% gain in January followed by declines in February the March.

“I’m optimistic now,” he said.

Many large wealth managers that place money in hedge funds say they need to see more of a sustained improvement before returning to currency funds. Bayerische Versorgungskammer, a German pension fund with €62 billion ($80.9 billion) in assets, withdrew its cash from five different currency-fund managers in January. After years of lackluster returns, the pension firm said it remains skeptical that their investment strategies can work in era of central-bank actions that distort markets.

“It is difficult to foresee when these interventions and uncertainties will come to an end,” said Martin Koneberg, the pension fund’s head of hedge funds and commodities.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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