“All the funds that are hot right now are having unusually good streaks because of what’s going on in the world right now, which is a risk-off environment,” said John Dean, managing director of London-based Absolute Return Strategies Ltd., which selects hedge-fund strategies for its investible indexes. “But foreign exchange changes its characteristics really quite rapidly. Risk-off is a one-in-five-year phenomenon.”
The Absolute Return Currency Fund lost money in each of the last three years.
Systematic Funds
First Quadrant is also riding rising demand for systematic funds. More than two-thirds of hedge-fund investors use systematic strategies, with investment consultants and pension funds driving demand, a Deutsche Bank investor survey conducted in February showed.
Unlike the traditional discretionary style of trading that leans on fund managers’ intuition and insight, systematic funds don’t take directional views and let the computer models do the work.
In First Quadrant’s framework, polarizing opinions on some of the most important questions in markets, such as oil’s outlook, U.S. recession risks and a Chinese hard landing, show big moves in currencies are ahead as investors await fresh evidence that’ll reveal the state of the world economy.
“In an environment when currencies have started moving and you have a pickup in volatility, you have more chance for foreign exchange to realign to their fair value,” said Saeed Amen, a cross-asset strategist at Thalesians Ltd., which specializes in quantitative finance. “Foreign-exchange fair value strategies like purchasing power parity, they tend to work in specific times. It’s not going to be the case for strategies like that to work continuously over a long time.”