Since the beginning of this year, the aggressive path of the Federal Reserve's interest rate hike has pushed the dollar to a record high and triggered sharp fluctuations in the exchange rates of various countries. This is a godsend for some quantitative traders and hedge fund managers who specialize in foreign exchange trading.

 

Foreign exchange hedge funds tracked by Eurekahedge Pte Ltd. are on track for their best year since 2003, as central bank monetary policy diverges amid rising market volatility. The dollar continued to rise, sending the euro and yen tumbling, and a BarclayHedge index tracking the performance of hedge funds showed trend-chasing foreign exchange managers were also set for their strongest performance since 2003. P/E Investments, a professional foreign exchange investment institution, achieved double-digit earnings growth.

 

"If you had told people a year ago that the dollar would break $140 against the yen, or the euro would be parity with the dollar, they would I will never believe you."

 

Since 2022, the US dollar has risen strongly and once approached the 110 mark; while the euro and the yen have been losing ground. The euro was once parity with the US dollar, and the yen against the US dollar once reached the 140 mark.

 

 

 

All of this is in stark contrast to the market regime that followed the global financial crisis, when central bankers unanimously launched dovish policies that thwarted carry and momentum strategies, curbed price volatility and the development of foreign exchange trading businesses. It will continue now. The number of private equity funds specializing in foreign exchange trading peaked in January 2010, but has fallen by nearly 80% since then, according to data provided by BarclayHedge.

 

Benjamin Crawford, vice-president and head of research at BarclayHedge, said: "The number of new exchange funds is small and it's getting smaller."

 

With U.S. inflation stubbornly high and recession fears intensifying, the Federal Reserve embarked on one of the most hawkish rate hikes in history. This has fueled a broad-based strengthening of the U.S. dollar and has led to weaker currencies in many countries around the world and greater price volatility between different currencies, providing an opportunity for foreign exchange-focused hedge funds to make money.

 

Meanwhile, the Russian-Ukrainian conflict has fueled investor risk aversion, with a Deutsche Bank measure of currency volatility recently rising to levels seen in the early days of the outbreak. It also helps forex traders to arbitrage between different markets.

 

"It's a 180-degree turn, with overheating inflation forcing central bankers around the world to raise interest rates, and they have to do so significantly," said Pablo Calderini, chief investment officer at global macro investment firm Graham Capital Management LP. Commodities, stocks and of course foreign exchange at the center of this storm.”

 

Graham Capital, which manages $18 billion in assets, manages a $1.5 billion macro investment strategy that has surged 45% in the first half of the year, driven by long dollar positions and short positions in the euro and yen this year.

 

Are there still trading opportunities in the foreign exchange market?

 

With inflation and uncertainty about the economic outlook, there may be more opportunities for foreign exchange traders. For example, Alan Ruskin, chief international strategist at Deutsche Bank, predicts that if Europe's energy crisis is resolved, the euro could surge by as much as 30%, which could be a huge gain for the right-traded FX fund.

 

Others, including macro hedge fund EDL Capital AG, are betting that the euro could fall another 20 percent against the dollar, as low as $0.80.

 

Rising rates should also help fund managers capture fresh returns from carry strategies, said Luc de la Durantaye, chief investment officer at CIBC Asset Management. This strategy involves borrowing in low-yielding currencies and then investing in high-yielding currencies.

 

"The global economic cycle is less synchronized now. That will create more volatility, but it will also depress correlations, which will create more opportunities," he said.

 

Melissa Brown, a former Goldman Sachs partner who is now head of applied research at consulting firm Qontigo, said new exchange funds are unlikely to emerge amid the latest bout of volatility, and easy-to-pay bets like a rising dollar are in the short term. A repeat is unlikely, and hopes for a strong economic rebound have been dashed time and time again. This shows that professional exchange funds will remain a rare breed for now.

 

Graham Capital’s Calderini said: “Now that FX has been a success, investors will also realise that in a global macroeconomic context, funds with allocations that are not limited to trading one asset are more ideal because these funds can trade Multiple assets."