Posted inAsset Class in Focus

Are currency funds set for a comeback?

Commodity trading advisor (CTA) strategies should benefit if market volatility remains high for a sustained period, and currency-focused funds are a particularly good bet, argues Harmen Overdijk, managing partner at Hong Kong-based Caidao Wealth.

He expects the high-volatility environment evident for the past couple of months to continue. “That is typically good for CTAs, when combined with clear trends.”

CTAs invest in futures and options on physical goods such as agricultural products, metals and energy, and on derivative contracts for financial instruments such as indices, bonds and currencies.

Caidao has boosted exposure to currency-focused funds in particular this year and is advising clients to do the same. The firm, an independent asset manager running $250m of client money, had no dedicated currency exposure at the start of the year. Now roughly 10% of portfolios are in such strategies. The increase has largely come at the expense of fixed income allocations. 

“We like the liquidity [of foreign exchange],” he explained, “and these strategies have been performing well since the start of the year.” 

Another plus for currency strategies is that in the past two months there have been much clearer trends in FX markets, resulting in an uptick in returns.

 Source: Eurekahedge *To August 30


Caidao uses FX managers largely based in the UK and US such as Cambridge Associates, Hathersage Capital Management and Salix Capital.

However, there are fewer currency-focused houses now than in the past, said Overdijk.

“Twenty years ago, this was quite a big asset class, but less so now because a lot of people got their fingers burnt and also there are now many more easily-accessible asset classes, such as REITs and funds of funds.”

But currency funds could make a comeback because generally banks have reduced their activity in the space, he said, potentially creating opportunities for other players.

Last year, currency funds returned 2.25%, compared to 9.2% for CTAs, according to EurekaHedge.

Time for CTAs?

In addition to FX strategies, Overdijk likes the CTA category in general, because it tends to be uncorrelated to equities and fixed income.

Others are also bullish on managed futures products. Peter Seligman, director at Meyado Private Wealth Management in Singapore, believes the time is coming for these strategies, given that volatility is increasing. “If they don’t get mass inflows now,” he said, “it would be interesting to know why not.”

But CTA’s have plunged this year into negative territory compared to full year 2014, when they returned 9.2%, according to Eurekahedge data.

Some wealth managers remain skeptical about CTAs. One is Kelvin Tan, head of investment funds at Singapore’s DBS Private Bank. He believes the current volatile environment may continue to challenge managed futures strategies.

CTAs thrive on clear and sustained trends, he said, but it is tricky for managers to perform in periods of heightened or “sideways” volatility.

“Most of them use momentum and trends, so when there are large and frequent swings, their models may be whiplashed,” Tan said.

 Source: Eurekahedge  *to August 30


Part of the Mark Allen Group.