Robert Savage, chief FX strategist with the firm in New York, says structural changes, including global deleveraging and fragmentation in global economic and monetary policy objectives, have undermined traditional investment approaches, leaving the industry looking for new ideas to make money.
Founded in 1981 by John Taylor in New York, FX Concepts was one of the first investment funds to attract broad institutional investment against a programmatic approach to currency investing. Between 2000 and 2008, the firm’s flagship fund, the global currency programme (GCP), generated returns of 16% as assets under management grew to $12 billion, says Savage.
“FX Concepts benefited from a shift in willingness in large institutions, pension funds and insurers to allocate capital to the asset class,” he says. “After the peak in 2008, when the asset class outperformed almost everything, investor willingness to maintain risk against FX became much more dependent upon returns.
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| Robert Savage, chief FX strategist, FX Concepts |
“In 2013, we have seen a perfect storm of cyclical and structural changes, including quantitative easing, a breakdown in global coordination in macro-economic policy and massive deleveraging coming from regulation, that means that trading styles like trend, carry and momentum are not performing as well as they did between 2000 and 2008.” FX hedge funds as a sector have struggled to generate returns this year. According to hedge fund performance data-provider BarclayHedge, FX manager returns are down 1.08% based on the firm’s BTOP FX Index, which seeks to replicate the overall composition of the currency sector of the managed futures industry with regard to trading style and overall market exposure.
Meanwhile, the Parker FX Index, which tracks 42 investment programmes managed by 35 firms on a global basis, was down 2.57% when it reported returns at the end of September. Systematic programmes in the index suffered a 3.87% negative return during May, June and July, bringing year-to-date performance to -0.78%.
Although FX Concept’s GCP remains positive at around 3% since inception, year-to-date performance collapsed versus its peer group to -10%, says Savage.
While some of the firm’s other four programmes generated substantial outperformance in 2013, for example the global financial markets fund, which is up 48% year-to-date according to Savage, on a capital weighted basis investor funds were heavily concentrated in the GCP. Assets under management stand at $621 million, according to Savage.
With the demise of FX Concepts amid industry-wide negative performance, commentators have recently focused on the challenges facing currency managers, with many concluding it has become a tough market to make money in.
However, notwithstanding disruptive cyclical shifts, such as the Fed’s monetary policy and reduced volatility, some managers argue positive returns can be achieved by a more diversified approach. Indeed, by Savage’s own admission, excessive concentration in a single strategy drove FX Concepts’ collapse, and its lack of restructuring options.
“Foreign exchange is absolutely a market that can offer investors attractive risk-adjusted returns, but changing dynamics mean managers have to take a more transparent, disciplined and diversified approach across strategies,” says one UK-based fund manager.
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Adds a London-based currency manager: “By diversifying across the well-known approaches like carry, emerging markets, value and momentum, we are very confident that the market continues to be attractive for long-term institutional investors.” As hedge fund operators find their ability to generate outperformance limited by the reduced levels of leverage that the prime brokerage community is now able to offer under new capital regulations, investment consultants are highlighting the potential appeal of relatively more passive, low geared and multi-strategy smart-beta approaches to FX.
For example, Los Angeles-based investment consultancy Towers Watson suggests that investors focus on the beta-components of strategies such as FX carry and emerging markets momentum by diversifying with equal weighting to hedge the risk of adverse exchange-rate movements.
“With 10 liquid developed-market currencies, there are 45 currency pairs an investor could potentially take positions in,” the firm stated in a report in August. “A simple smart-beta approach would weight each of these pairs equally, with the higher interest-rate currency being bought against the currency with lower interest rates using forward contracts.”
While passive strategies are suitable products for traditional index providers, active managers might find it hard to charge alpha fees for these smart-beta approaches.
“Beta is a good concept and matters to the way FX works, but that doesn’t mean that alpha is not out there,” says Savage. “The future of currency investing should take a more inter-related approach to financial markets. Equity and bond markets contain information that is capable of generating unique returns from FX.”
FX Concepts is in the process of returning money to investors, and will close all five funds when the process is complete.