FEBRUARY 7, 2012, 2:11 P.M. ET
Article from The Wall Street Journal
By Neil Shah
Of THE WALL STREET JOURNAL
NEW YORK (Dow Jones)--It's been a glorious year for global markets, but currency funds have largely missed out.
Foreign-exchange-focused investment managers gained 1.2% on average in January, according to Parker Global Strategies, which invests in currency funds and tracks programs with a total of roughly $10 billion under management. That's below the 2.3% gain for hedge funds in general, based on the Dow Jones Credit Suisse Core Hedge Fund Index, part of a series of indexes tracking over 8,000 hedge funds.
The lagging performance comes after many currency funds stuck to U.S. dollars at the end of 2011, after taking heavy losses betting on riskier currencies during a bumpy period in financial markets. They were slow to emerge when emerging market currencies like the Mexican peso began to take off in the new year. By focusing solely on currency, specialty funds also are missing out on even more impressive growth in stocks and European bonds.
"It's been a very mediocre month after a very bad year," said Luca Avellini of JW Partners, which invests in 23 funds with a combined $20 billion under management in currency strategies.
Many funds started dumping dollars and buying riskier assets in mid-January, which means they could benefit if global markets continue to rally in coming weeks.
But the lackluster performance so far won't help currency funds win back investors lost last year. Assets under management at currency funds are at roughly 60% of the level at the start of 2011, according to an industry source who tracks such data but didn't want to be named because of the sensitivity of the information.
Partly it's because the value of underlying assets has gone down. FX managers lost 6.2% on average in 2011, according to Parker Global. But clients are also yanking their cash from such funds.
"It has been a huge drop," the person said.
Several factors are driving the recent rally. For starters, the European Central Bank in December doled out a total of EUR489 billion in three-year loans to Europe's banks to avert a funding crisis. The U.S. economy is showing signs of picking up steam--last Friday, the government said the unemployment rate fell to 8.3%, the lowest since February 2009. Yet the Federal Reserve signaled it may hold interest rates near zero through late 2014.
"I started the year being bearish," said Stephen Jen, founder of SLJ Macro Partners LLP in London, in a note Monday. "But the sharp turnaround in risk assets in the last six weeks is well justified, in retrospect ... I can now see more clearly some game-changing events that took place."
Most emerging markets, which ended 2011 with Europe's debt troubles threatening to slam the brakes on their economies, are now seen posting strong growth in 2012.
That's been a particularly painful reversal for currency managers, as emerging-market currencies have risen sharply against the dollar. The Mexican peso and Indian rupee rose over 6% against the dollar last month, their strongest Januaries since 1991, according to French bank Societe Generale SA (SCGLY, GLE.FR). The Brazilian real and Colombian peso had their best Januaries in 19 years.
Investors shifted a net $3 billion into global and regional emerging market investment funds in the week ended Feb. 1. Yet currency specialists were holding dollars for much of January, JW Partners' Avellini said.
It wasn't just emerging-market currencies that proved tricky to trade. The euro's decline in November and December abruptly reversed in mid-January, forcing some investors to jump out of bets it would continue heading lower, traders said. The Fed's outlook for low rates, meanwhile, hurt traders who had bought options to sell the Japanese yen and buy the dollar.
The recent rally could continue precisely because of the "less-than-enthusiastic participation" among investors thus far, Jen said. "Investors who have been underweight risk will likely try to get on the bus."
-By Neil Shah; Wall Street Journal; 212-416-2619; neil.shah@wsj.com
Article from The Wall Street Journal