In a year when the world’s biggest hedge funds are suffering losses and closures, one asset manager is trouncing rivals by betting on currencies -- without taking a view on their direction.
Quaesta Capital AG, a hedge fund based in the Zurich area, runs a $420 million foreign-exchange options program that earned 21 percent this year through Nov. 11 by wagering on volatility, according to Thomas Suter, the company’s chief executive officer. It’s the top performer among 15 programs tracked by the Parker Global Currency Manager Index, which lost almost 2 percent in that period.
The strategy, dubbed v-Pro, has profited by speculating that swings in major currencies will grow more pronounced as the Federal Reserve moves to lift interest rates from near zero. It’s the only strategy in the Parker index that focuses on volatility, which has rebounded from a record low set in 2014. Quaesta uses dynamic delta hedging -- a wager on volatility that requires constant adjustments to make sure it avoids taking a stance on foreign-exchange movements.
"We’re convinced the market will stay volatile in the future -- the overall levels on implied volatility are still not too high," said Suter, whose 16-person firm was founded in 2005 and manages about $3 billion. The key to the strategy is to "always include the dynamic delta hedging so you don’t end up with a direction exposure."
2015 Surprise
At a time when central banks’ decisions are commanding the attention of financial markets, the program’s returns show that currency traders can make money without piling in to the most crowded trades. In April, the consensus bet -- that the Fed will raise its target while other economies’ policy makers add monetary stimulus -- produced the biggest monthly loss in the dollar since 2011.
A rebound in volatility in the $5.3 trillion-a-day market is driving returns for the volatility strategy, which outperformed the Parker Global index in seven of the past eight years. The fund’s 1 percent gain in 2014 compared with a return of about 3 percent for the Parker gauge.
Events such as the Swiss National Bank’s January decision to remove its cap on the franc and the devaluation of the yuan in August by China’s central bank roiled exchange rates. Implied volatility in major currencies has averaged 10 percent this year, up from 7.2 percent in 2014, the lowest annual level in JPMorgan Chase & Co. data going back to 1992. The gauge has fallen below its 10-year average this quarter.
Funds Closed
Market swings have challenged some money managers that invest across asset classes. Some 417 hedge funds announced shutdowns in the first half, according to Hedge Fund Research Inc. BlackRock Inc., the world’s largest asset manager, is winding down a macro fund after losses and investor redemptions. It joins money managers including Fortress Investment Group LLC and Bain Capital that closed macro funds this year.