There is a lot of press around discussing the struggles currency managers are having in making money in markets that ostensibly should be fertile ground. We have some real moves, event risk, interest rate divergence and a changing market structure – all of which would suggest there is an opportunity for everyone.
I have also, in the recent past, wondered about the relative lack of success of currency managers, but I feel it is also important to highlight that this title represents a very broad spectrum – not all managers are doing badly, some are doing quick nicely thank you.
So is there a problem and if so, why? This is not the first time that I have pointed out that the focus is always on the larger managers, who tend to be trend following, and while one could assume that a trend should have emerged over the past year (the dollar has shifted quite a bit of course), it is not enough. We live in a different world to the 1980s and 90s when we saw broad swings in the main currency pairs and so many of these managers were formed. Everything is shorter term and the rise of mean reversion, thanks mainly to automated trading firms, is anathema to the trend follower.
Elsewhere in currency manager land there are probably firms that are doing well because they are mean reverters, but again, they’re probably not doing as well as they would hope, because every now and again, the move doesn’t revert and they give something back.
In recent years one way for a currency trader to make good money has been speed – if they were quick enough they could arbitrage “inefficiencies” and make a steady stream. The problem with this strategy is that firstly few of these funds are open to outside investors – perhaps it’s the scrutiny that comes with such a move? – and secondly the strategy has rather been found out in recent years and such firms ring-fenced onto venues where the “good” flow rarely goes.
So each and every strategy has its good and bad moments and the whole is, apparently, a run of bad performance for the industry as whole. If so, is there anything that can be done to change that?
In reality I am not sure there is, because it would mean changing the mentality of a tremendously conservative and reactionary group – investors. The problem for currency managers is that all of those factors I mentioned at the top of this piece are part of the narrative in markets at the moment, but none of them are dominant.
These different narratives mean different strategies have the upper hand at different times – and that is not an easy environment for a currency manager to operate in.
The answer is, of course, more flexibility, but that means we edge into the world of style drift – and that is a no-no. Not only does it make investors nervous, it also spoils their nicely created diversified strategies (most of which end up being the same!)
It is hard, therefore, to see light at the end of the tunnel for currency managers, unless they all wish to go short term – and here I am talking hours rather than microseconds. If that happens they can opportunistically pick off profits and, hopefully, stay out of the way when their particular strategy isn’t working – sometimes square is a good position!
The glass-half-full twist to this is market conditions such as these could lead to investors looking at a much broader cross section of managers as they seek to tap into the different strategies. The downside means investor money will be even more fluid and they will in some instances no doubt try to “trade” the managers in their portfolio.
This means further uncertainty for managers, which doesn’t exactly help build confidence, and something else that doesn’t help is the reluctance of investors to believe in FX as an investment vehicle in the first place. On the latter, the headlines at the moment are not helping, which leads me to believe we are, sadly, in a vicious circle.