Hedge Funds Are Dabbling In Currencies Again

by Carla Johnson, Investors Offshore, London

29 August 2002

Currency trading used to be the technique hedge funds were famous for: in those golden days George Soros could rock governments by threatening a currency squeeze, and walk away with a few billion dollars as well as another fifty press clippings for his archive.

In recent years however the currency markets have been far less volatile, and therefore far less appealing for hedge funds. And the markets lost a dozen important currencies overnight when the euro was launched last year. According to the Center for International Securities and Derivatives Markets, currency funds returned only 2.13% in 2001, 5.15% in 2000 and 2.90% in 1999, compared with returns of 10-20% between 1995 and 1997 and as much as 42% in 1990.

Now, says the Wall Street Journal, with equity markets themselves becoming dull, hedge funds are returning to the currency markets, but with a more aggressive approach than used to be the case.

The Journal gives the example of London-based Polpo Financial Ltd., a fund with about $74 million of its $75 million portfolio in currencies. For Polpo it's all a case of getting in and out fast, setting up tight stop-losses that produce a sizeable profit on as little as a 40- to 60-point move in a currency pair, according to the company's director of foreign exchange operations Philip Jones.

Hedge funds are also returning to emerging market currencies, another area in which the sector's past greats like Quantum and Tiger used to dine out. The problem with emerging markets was always lack of liquidity - just when you need to quit, you find you can't. Now liquidity for fringe currencies like the Mexican peso and the Polish zloty has improved, and some of these markets have developed liquidity in derivatives as well. Anyway, so they say!

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