Introduction
The Eurekahedge FX Hedge Fund Index tracks the performance of dedicated currency investing hedge funds in the spot, futures and forward markets utilising both systematic and discretionary overlays and investing across all of major, minor and exotic currency pairs. Historical returns for the index along with constituent details can be accessed here.
The Eurekahedge FX Hedge Fund Index was up 0.10% in June in what turned out to be a volatile month for global currencies. Underlying managers reported losses on their long USD versus emerging market currency pairs’ positions in the earlier part of the month as disappointing US non-farm payroll data pushed back expectations of a summer rate hike in the US. Short positions in the Rand proved to be costly for managers as South Africa avoided an expected ratings downgrade which saw the currency rally strongly. Long positions in the Korean won versus other EM currencies was also a winning trade as the currency appreciated on hopes of fiscal stimulus despite a surprise rate cut earlier in the month. FX hedge funds reported mixed gains on G-10 FX spread trading, with long positions in the New Zealand dollar against other currency pairs delivering gains as the Kiwi central bank decided to hold rates steady. Long positions in the Canadian dollar also realised gains for managers as oil prices continued to recover. Meanwhile, the latter part of the month proved to be challenging as Brexit was unleashed on the markets, with some managers caught on the wrong side of the dollar-pound and dollar-yen equation. Short-term intra-day FX trend following and momentum strategies fared relatively better and were able to ride the trends that emerged and posted good gains from their short-pound and long Japanese yen positions as markets went into panic mode.
Figure 1: Eurekahedge FX Hedge Fund Index vs. Eurekahedge 50 index
On a year-to-date basis, FX hedge funds are up a modest 0.79%, ahead of the gains posted by the Eurekahedge 50 index – an annually rebalanced diversified portfolio of 50 large hedge funds – which is down 0.22% for the year. On a three year annualised basis, the Eurekahedge FX Hedge Fund Index is up 4.31% compared with a 2.96% gain for the Eurekahedge 50 index. Underlying managers have also realised these gains at lower volatility levels as shown in Table 1, with risk-adjusted returns or Sharpe ratio over this three year period coming at 1.25.
With almost 44% of the constituents for the Eurekahedge FX Hedge Fund Index offering daily liquidity, and another 19% giving weekly redemption terms, the strategy could be an interesting one for investors seeking active exposure to currency markets through relatively liquid hedge fund offerings.
Figure 2 graphs the Eurekahedge FX Hedge Fund Index against the Deutsche Bank Currency Return Index DBCR (USD – Total Return). The DBCR USD Index captures gains accruing from three common FX investing styles – mainly carry, momentum and valuation and thus is being deployed as a broad benchmark here to compare the gains for FX investing hedge fund managers. As shown in Figure 2, FX investing hedge fund managers have outperformed the DBCR (USD – Total Return Index) and have displayed lower volatility levels in the process since 2014. Over a 2 year period, FX hedge funds have posted annualised returns of 6.97% in comparison to 3.09% for the DBCR Index, with lower volatility over this period which results in a Sharpe ratio of 2.09 versus 0.50 for the latter as shown in Table 2. Returns for the current year have been more muted in comparison for FX hedge funds, with gains coming in at 0.79% versus 4.23% for the DBCR Index which realised strong gains in June and was up 3.59% during the month.
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