Currency managers won't be leading late-night celebrations after foreign-exchange funds suffered their worst year since 2011 as bets on monetary-policy divergence disappointed.
A Parker Global Strategies LLC index that tracks top funds in the industry lost 2.4% this year after the US Federal Reserve failed to raise interest rates as soon as some traders expected. Currency strategies that seek to benefit from rate differentials - known as carry trades - lost the most in seven years, a Deutsche Bank AG measure shows.
After a promising start to the year, with returns basking in their longest streak of monthly advances since at least 2003, gains tailed off as the Federal Reserve tied rate increases to economic improvement amid signs of a patchy recovery. That sapped momentum from the dollar and investors turned instead to emerging-market currencies and those of commodity exporters, only to be slammed by a perfect storm of falling oil prices and increased volatility.
"When you're in foreign exchange, it's not for the faint of heart - you've got to like roller coasters and if you don't like roller coasters, you're in the wrong business," said Paresh Upadhyaya, director of currency strategy in Boston at Pioneer Investments, which oversees about US$241 billion. "People had very high expectations that the Fed was going to begin the tightening cycle, which really didn't happen for many, many months." Pioneer remained profitable with its foreign-exchange positions by staying the course with its core bet on dollar strength, Mr Upadhyaya said. The Bloomberg Dollar Spot Index, which tracks the US currency versus 10 peers, has gained 8.9% this year.
The second quarter proved to be most currency funds' undoing. Managers lost 3.8% in the period from April through June, according to the Parker index, the worst in data going back 12 years.
Investors preparing for the Fed's first rate increase since 2006 were blindsided when the central bank instead downgraded its predictions for US growth and inflation in March, sparking a dollar selloff as hedge funds and other large speculations cut near-record wagers on dollar strength.
Reluctance to return to that trade as the Fed shunned a rate increase in both June and September fueled a search for yield elsewhere, with investors borrowing in countries with low interest rates to invest in higher-yielding currencies. These so-called carry trades imploded as oil, a core export for developing economies, fell to the lowest in more than a decade.
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A Parker Global Strategies LLC index that tracks top funds in the industry lost 2.4% this year after the US Federal Reserve failed to raise interest rates as soon as some traders expected. Currency strategies that seek to benefit from rate differentials - known as carry trades - lost the most in seven years, a Deutsche Bank AG measure shows.
After a promising start to the year, with returns basking in their longest streak of monthly advances since at least 2003, gains tailed off as the Federal Reserve tied rate increases to economic improvement amid signs of a patchy recovery. That sapped momentum from the dollar and investors turned instead to emerging-market currencies and those of commodity exporters, only to be slammed by a perfect storm of falling oil prices and increased volatility.
"When you're in foreign exchange, it's not for the faint of heart - you've got to like roller coasters and if you don't like roller coasters, you're in the wrong business," said Paresh Upadhyaya, director of currency strategy in Boston at Pioneer Investments, which oversees about US$241 billion. "People had very high expectations that the Fed was going to begin the tightening cycle, which really didn't happen for many, many months." Pioneer remained profitable with its foreign-exchange positions by staying the course with its core bet on dollar strength, Mr Upadhyaya said. The Bloomberg Dollar Spot Index, which tracks the US currency versus 10 peers, has gained 8.9% this year.
The second quarter proved to be most currency funds' undoing. Managers lost 3.8% in the period from April through June, according to the Parker index, the worst in data going back 12 years.
Investors preparing for the Fed's first rate increase since 2006 were blindsided when the central bank instead downgraded its predictions for US growth and inflation in March, sparking a dollar selloff as hedge funds and other large speculations cut near-record wagers on dollar strength.
Reluctance to return to that trade as the Fed shunned a rate increase in both June and September fueled a search for yield elsewhere, with investors borrowing in countries with low interest rates to invest in higher-yielding currencies. These so-called carry trades imploded as oil, a core export for developing economies, fell to the lowest in more than a decade.
Click Here To Register For Free Trial Services OR Give A Missed Call : +6531581402 Follow Us On Twitter : www.twitter.com/epicresearchsg Like Us On Facebook : www.facebook.com/EpicResearchSingapore Need Any Assistance Feel Free To Mail Us at : info@epicresearch.sg
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