October 26, 2011
Hedge Funds Dump Currency Bets As Markets Brace For Swings
Hedge funds are dumping their currency trades across-the-board as they brace for unprecedented market-moving developments on both sides of the Atlantic.
While global investors have recently turned cautiously optimistic about economic troubles in the U.S., China and Europe, hedge funds are reducing their exposure to currencies to the lowest level in more than two years, according to Parker Global Investors, a firm that invests in currencies-focused hedge funds.
Parker Global's measure of currency-exposure across 20 currency hedge funds has dropped from above 200 in April to around 70 this week--the lowest level since early summer of 2009, when investors were starting to recover from the 2008 global financial crisis but were still wary of making risky bets.
Hedge funds seem especially tentative about selling dollars and buying the euro or emerging-market currencies, Parker managing director Jon Stein says. They fear Europe's deepening financial crisis could undermine economic growth in developing-world economies where struggling European banks have made big loans. If European banks buckle, investors fear unknown ramifications.
"We have seen broad deleveraging across most currency positions, with a higher portion of assets now kept in cash," said Luca Avellini, partner at JW Partners, a Milan-based research and advisory firm for currency hedge funds. He sees mounting concerns about the euro.
Funds have been shifting their money from stocks, bonds and currencies to cash for months primarily because they have had a tough time predicting global markets this year. This hesitancy has gone into overdrive for currencies recently because investors fear turmoil from Wednesday's European leaders' debt-crisis meeting and the U.S.'s latest economic-growth report Thursday.
Another reason funds are going into cash is that some banks are trying to protect their balance sheets by limiting their trading with hedge-fund clients. As the year-end nears, some underperforming managers are getting requests from clients for their money back.
George Papamarkakis, co-founder of North Asset Management LLP, which manages some $200 million, recently sold his bullish position on the dollar after profiting from the U.S. currency's sharp 6% rise against other currencies last month.
Investors had piled into the dollar--the world's premier reserve currency--as Europe's worsening debt crisis prompted a frenzy for dollars among European banks and fears of a rerun of 2008's global financial crisis.
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