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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.
Can Peer Pressure Work? 2018 is a big year for the FX Global Code as it will celebrate its first anniversary – a date by which all participants are expected to have adhered to the code’s principles. Will the code be a success? Colin Lambert thinks he has the answer. It was, and still is, depressing having to read through legal papers and regulatroy notices on a regular basis, all of which deal with misconduct in FX markets, and nobody whould be misguided enough to think that such actions will not continue in the year ahead. They will, and probably the year after that. There is an upside in having to rake over the ashes of past misdemeanours, however, because it offers a timely and regular reminder of the importance of the FX Global Code.
Not Necessarily Consolidation But... There isn't much left up for grabs, but 2018 will see a deal in the platform world, says Colin Lambert. In all the history of the Profit & Loss Crystal Ball, platform consolidation has been the most fertile ground.....mainly for critics! If viewed in terms of the number of deals, however, the story is a little different. The headline has been in demand from exchange groups for an OTC presence, culminating in deals for Hotspot, 360T and Fastmatch, and it is hard not to see this continuing – in spite of CME finally deciding to do something about further penetrating the OTC space by launching a service itself rather than entering partnerships.
One Cryptocurrency to Rule Them All? Other cryptocurrencies will continue to catch up with bitcoin this year, but this is by no means a bad thing for this nascent industry, says Galen Stops. "Whether it works out or not, the bitcoin story definitely has further to go. And regardless of its success or failure, it seems increasingly likely that virtual currency, in one form or another, is here to stay" - "Does Bitcoin Have a Future?" (Profit & Loss, December 2013). A lot has changed in the intervening years since Profit & Loss published the above statement in conclusion to its first ever feature length article on bitcoin.
EUR to Spring a Surprise on Markets? The euro performed well in 2017, but can it keep going? Galen Stops suggests that political factors mean that this currency could surprise markets in 2018. This time last year, the European Union was still grappling with the fact that one of its biggest members was poised to leave the club, people were nervous about a populist, anti-EU party winning the Dutch general election, and even more nervous about a populist, anti-EU party winning the French election and presidency. As a result, markets were – understandably – pricing a lot of risk into the Eurozone.