Ex-JPMorgan Traders AI Fund Readies for FX Volatility Surges

(Bloomberg) -- An artificial intelligence-driven hedge fund run by two former JPMorgan Chase & Co. derivatives traders is betting on currency volatility to rise further in 2019, with China’s yuan and Turkey’s lira their prime targets for money-making opportunities.

Ensemble Capital Pte Ltd., set up earlier this year by former FX option traders Damien Loh and Atsuo Ogaki, sees scope for volatility in both currencies to spike, despite easing trade tensions and calming emerging markets. Their trade: go long volatility and fade the rally.

“Generally volatilities will grind higher, but what will happen is there’s always going to be a big spike in the front end, and you should look to fade it,’’ said Loh, chief investment officer at Ensemble, referring to selling positions when short-term volatility surges. “Be long volatility, but be nimble enough to sell the front end.”

Ex-JPMorgan Traders AI Fund Readies for FX Volatility Surges

Price swings in emerging-market currencies from South America to Asia have surged this year as escalated trade tensions, a strong U.S. dollar and rising Treasury yields weighed on developing nation securities. A gauge of volatility is up 12 percent year-to-date, the most since 2016, as jittery investors bought protection against large moves across markets.

Ensemble’s absolute return fund uses so-called deep-learning algorithms to analyze data and forecast market moves to help its traders generate returns. The model monitors trading levels across a variety of asset classes as well as economic figures and consensus estimates, and assigns potential return probabilities to various trades.

“It can say if you’re positioned this way, chances are you’re going to make a lot more money than the other way around,” explained Loh in an interview in Singapore. “So the odds, the probabilities are with you, or there’s an asymmetric payoff in this sense.”

Loh declined to reveal how much the firm manages.

Volatility Pause

Despite its rise this year, implied volatility on the offshore yuan plummeted on Monday after Washington and Beijing called a truce on their trade war. Similarly swings in the lira have eased after Turkey’s central bank aggressively raised interest rates to help combat runaway inflation.

Don’t bet on the serenity to last, according to Loh.

Turkey may have raised rates but inflation is “still high on an absolute basis,” Loh said. “People have been chasing returns and a lot of real money has been put in there. But if we start to see risk assets sag again, it’s likely they’ll depart from the Turkish market.”

The U.S.-China truce is also unlikely to be the end of the trade war, Loh said. “There will still be a lot of back and forth, the economy is still going to slow down,” he added.

One month volatility in the yuan climbed 1.4 percent in Asian trading Wednesday as optimism around the trade truce faded amid skepticism that there’s been any breakthrough with the U.S.

Ex-JPMorgan Traders AI Fund Readies for FX Volatility Surges

Ensemble’s strategy has managed to return about 2 percent this year, below the double-digit returns the firm has targeted. Gains have been lower as the firm’s investment staff placed hedges on trades rather than allowing the machine to “do its thing,” Loh said.

“You have to step back a little bit and if you give it all the info it comes to the conclusions differently to how the human thinks,” he said. “If we’d sat back and followed the model more closely, we would have done better.”

©2018 Bloomberg L.P.