Currency Hedge Funds Bailed Out By US Dollar’s Slide

by Phillip Morton, Investors Offshore.com

06 January 2005

The slide in the value of the US dollar since October 2004 has helped many hedge funds specialising in the currency markets to recover from several months of losses incurred during range-bound markets earlier in the year, the Financial Times reports.

"Managed futures funds had a tough year until the breakout. When it came they were biased towards short-dollars and they were in a really good position to pile on top of it,” observed Sean Callow, a New York-based currency strategist at IdeaGlobal.

Between October and the year’s end, the dollar had fallen more than 7% against the euro after breaking out of the range that had restricted movement in the currency pair for several months, and for some hedge funds, this swing has meant a dramatic reversal in fortunes.

One example of this is the performance of hedge fund group John W Henry in the latter months of 2004.

According to the FT, in September Henry's Currency Strategic Allocation Program was down 29.4% on the year. However, by the end of November, the fund had bounced more than 19% to cut its losses to less than 10%.

Meanwhile, Henry’s dollar programme, which only trades in dollar US dollar currency pairings, returned a mighty 26% in October and followed this up with an even more impressive 38% in November.

Hedge fund indices have also indicated strong performance among commodity and forex funds. The CSFB/Tremont Managed Futures Index returned 5.8% in November, and 5.2% year to date.

"The dollar move has bailed people out. The dollar kept threatening to break and finally when it did they were positioned for it," observed James Binny, director of FX analytics and risk advisory at ABN Amro.

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