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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.
Going Greener Recycling is a good thing - just ask the environmentalists - but is it a good in FX? Colin Lambert thinks this year, it could be decided that it is not. The phrase "liquidity mirage" is almost as old as e-FX trading, but it's hard to believe that the originator of that phrase had today's FX market in mind. In 2003, when many of us first heard then Bank of England chief dealer Martin Mallett use the phrase, even the e-world was a very different place. Technology had not yet democratised the industry, non-bank market makers were finding their way in equities and futures markets and yet to really enter FX, and there was a real divide between market maker and liquidity consumer.
And the Pendulum Swings Back Institutional investors have long understood the value of diversifying their portfolios, and this usually means investing internationally. But when they buy foreign equities, they’re actually buying two portfolios, the first being the long equities denominated in their base currency, and the second is that they’re shorting their base currency against the foreign currency they need to purchase the equity. This presents institutional investors with a choice: they can do nothing and accept the risk of holding this foreign currency, hedge that currency exposure passively or manage it actively.
Edging Towards the Exit? The use of a last look window by market makers will decrease in 2018, but don't expect the practice to disappear any time soon, says Galen Stops. If you're sick of reading endless articles and hearing lengthy debates at conferences regarding last look, then the first part of this prediction will be music to your ears: in 2018 the industry conversation will move on from this topic. This prediction comes despite a second one, that last look will not disappear in 2018. Yes, XTX Markets made headlines by committing to a zero hold time on their FX trades – not to be confused with offering firm liquidity – while other market makers have made more private assurances of a similar kind.