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A Question of Faith: Asset Managers and the Fix Benchmark fixes have been immersed in controversy for the past five years, but anecdotal evidence sees no shift in asset manager attitudes to them. Colin Lambert asks, will these firms ever desert the Fix? If there has been one lightning rod for controversy in what has been a pretty turbulent period for the foreign exchange industry it has been benchmark fixes. Banks have been fined, traders and managers have been dismissed, and some are facing legal sanctions, including jail, thanks to various activities all of which were centred on the WM and European Central Bank fixes.
A New Breed of FX Hedge Fund There is a new breed of hedge funds that are using artificial intelligence (AI) tools to trade the currency markets. Galen Stops takes a look at a few of these emerging funds. “AI has become a catch-all phrase, everybody and their grandma wants to use it now because it's a buzzword,” says Damien Loh, the CIO at Ensemble Capital, a Singapore-based hedge fund. With an academic background in computer science, Loh spent 15 years at JP Morgan before launching Ensemble Capital in 2017 alongside Atsuo Ogaki, the former head of FX at Nomura in Tokyo and 22-year veteran of JP Morgan.
The Buy Side and the Global Code: Patience Required Much has been made of the low buy side sign up to the FX Global Code, but as Colin Lambert finds out, it is likely only to be a matter of time. Talk to senior members of the Global FX Committee and one can discern a sense of exasperation when they are asked (probably for the tenth time that day) about the lack of buy side adoption of the FX Global Code. The exasperation stems from what is the thorn in the side of the GFXC that is low adoption rates.
Getting to Grips with FX Exposures For many corporate treasurers, deciding what products to use in order to hedge their FX exposures is the easy part of the job. The hard part is working out exactly what their FX exposures are. Galen Stops reports. When it comes to effectively hedging FX exposures, it seems that the biggest challenge facing corporate treasurers is simply getting an accurate view of what these exposures are. “Getting a centralised view of our FX exposures is very difficult. It’s always an issue, it’s something that we work on constantly and we’ll probably never get to the point where we have a perfect view on this,” says a source at one European corporate with revenues over $22 billion.
Unhedged FX Risks Hit Corporate Earnings There were a number of revealing statistics in the results of a risk management survey released this summer by HSBC in which 200 CFOs – or equivalent members of the finance department – and 296 senior treasury professionals took part. The most immediately eye-catching amongst them was the fact that 70% of CFOs said that their companies have experienced lower earnings due to significant unhedged FX risk in the past two years, and moreover, that these were risks which their treasuries could have avoided.
Spring Time for Hedge Funds? Hedge funds have been much maligned post-financial crisis due a perceived lack of performance. Is this criticism fair? And what is the prognosis for currency funds in particular? Galen Stops takes a look. Earlier this year, Cliff Asness, founder, managing principal and CIO of AQR, published an excellent piece explaining why hedge fund returns should not be compared to 100% long equities returns, as they so often are when people use the S&P 500 as a benchmark. In the article, Asness was unequivocal in his conclusion that hedge funds not keeping up with equities during a nine-year bull market was completely predictable and is certainly not a reason to worry about the performance of these firms.
Show Me the Money Looking at some recent hedge fund surveys, one clear trend emerges: hedge fund fees are under continued pressure. Galen Stops takes a closer look. Each year, many of the largest investment banks publish extensive surveys regarding investor appetite and expected asset flows for the coming year. In many regards, trying to compare these surveys is tricky, given that each bank collects different data sets and then reproduces this data in very different formats. One thing was made abundantly clear in the latest batch of surveys, however, and that is hedge fund fees are continuing to come under pressure from investors.
CTAs: All Grown Up Susan Roberts, product specialist and director of investor relations at Campbell & Company, talks to Galen Stops about how the CTA industry has matured, what purpose these funds are really supposed to fulfill within a portfolio and why performance might be set for an uptick. Galen Stops: In the research paper, Prospects for CTAs in a Rising Rate Environment: A Refresh, your analysis finds that CTA performance has not historically been interest rate regime dependent. Is this pretty much what you expected the data to tell you when you began working on the paper?
FX: Going Back to its Roots? Much has been made of the struggles of speculators to make money in FX in recent years. Colin Lambert takes a look at data that suggests speculators are on the decline, and hedgers on the rise – and he sees some good news for the banks in this, if they can stay one particular course. Spot FX is “over-broked” to use the market vernacular – there are so many market makers, many of whom are recycling liquidity, that differentiating oneself in this market is extremely difficult unless you are either at the very quick end of the spectrum or are handling plenty of large tickets that require care around the execution.
SGX: Doing Things Differently “It’s not rocket science, but it is a different approach compared to other exchanges,” says KC Lam, head of FX and rates at SGX, when discussing the exchange’s new FlexC FX futures, which aim to “futurise” certain OTC FX product offerings. This is, of course, a reference to the recent product initiatives launched by various exchange groups in an attempt to bridge the gap between OTC and listed FX trading. While Eurex has launched rolling spot futures, which mimic the trading of OTC FX spot contracts, combined with the daily usage of a tom-next (T/N) swap in order to roll over the value date of the spot position, and CME has launched CME Link, spot FX basis spreads offered on Globex to create a central limit order book (CLOB) between the OTC spot FX and CME FX futures markets, SGX is indeed taking a very different approach.