Are Active FX Funds About to Turn a Corner?

Despite a decline of investment into actively managed FX funds in recent years, speakers at the Profit & Loss Forex Network New York conference expressed optimism for these funds.

Chris Solarz, a managing director at Cliffwater, a firm that provides investment advisory services, explained that hedge fund strategies in general have struggled to outperform indices since the financial crisis, both on an absolute and relative basis.

“Someone mentioned on an earlier panel that it’s not fair to compare hedge fund strategies, hedge fund indices, to the S&P – but in the industry 10 years ago, that’s not at all how we were selling it. We were calling hedge fund strategies equity-like returns with fixed income-like vol, and now it’s been more convenient to say that we have a better Sharpe ratio perhaps than the S&P, and that’s been the picture. We’ve had a dearth of alpha over the past 10 years,” he said.

But FX funds actually continued to perform well in the years immediately after the financial crisis, with Solarz pointing out that there were numerous funds with over $1 billion AUM that were producing good alpha during this period. Yet by 2014, one year after the demise of FX Concepts, which was at one time a $14 billion FX fund, active FX returns had become so poor that this was often no longer considered a viable standalone strategy and so much of the FX trading at hedge funds was rolled into discretionary macro funds or CTAs trading across a variety of different asset classes, according to Solarz.

There is good news for FX funds though, he said, because while the lack of alpha in the market was largely caused by the coordinated central bank monetary policy that followed the financial crisis and led to $10 trillion being injected into the financial system, those policies are now increasingly diverging.

“One year from now, that flow in will become an outflow, and at that point we won’t have a heavy hand of government intervention which is distorting the clearing mechanism of markets,” commented Solarz.

Partially as a result of this, he expressed optimism that active management could make a comeback within FX, and said that there is still room for currency-specific funds within financial markets today.

Momtchil Pojarliev, deputy head of currencies at BNP Paribas Asset Management, agreed with this last point, stating that FX alpha strategies are reliant on volatility, which has been subdued in recent years, but appears to be on the rise once again.

“I think alpha is going to come back strongly,” he concluded.

Pojarliev suggested that one reason why active currency management has declined in popularity amongst investors in recent years is because some of them have tended to confuse active currency hedging programmes with absolute return – or alpha seeking – strategies.

“Part of the reason people have been burnt in FX is that what they bought didn’t meet expectations, because they didn’t know exactly what they were buying,” he said.

Pojarliev added: “When you’re talking about FX you have to differentiate between alpha, or FX as an absolute return strategy, which is completely unconstrained and to some extent is basically a truncated version of a global macro…The other thing is actually active hedging, which is a tailored solution for people who have currency exposure and don’t want a passive solution…When you’re talking about performance and the environment, you have to differentiate between those two.”

Galen Stops

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