Hedge Funds Doing Their Utmost to Defy Volatility Collapse

(Bloomberg) -- Hedge funds focused on the $5.1 trillion-a-day foreign exchange market are trying to circumvent the dearth of volatility by going farther afield to find an edge.

GCI Asset Management is tapping managed futures -- often leveraged instruments -- for Japanese clients willing to invest a small amount of money for higher returns. Macroscope Capital Ltd., founded by former HSBC managing director Manoj Hemrajani, is investing in gold as an alternative to trading the dollar.

“If managers have the flexibility to trade gold, it’s really the purest bet on the dollar -- or against it -- because it’s not influenced by monetary policy of countries,” Hong Kong-based Hemrajani said in a telephone interview. “As volatility falls, it’s like a risk play for or against the dollar.”

Price fluctuations across currencies tumbled to the lowest level since September 2014 as signs of cooling in major economies have spurred central banks like the Federal Reserve and European Central Bank to shift away from plans to tighten monetary policy. Wall Street traders are in a bind as short-volatility strategies offer fewer rewards, while long bets look risky.

Only a crisis is likely to revive forex volatility across markets now, strategists from MUFG Bank to Russell Investments predict. JPMorgan in a March 15 note listed potential catalysts for a return to higher volatility, including failed U.S.-China trade talks triggering a tariff increase, and a destabilizing spike of Brent crude above $80 a barrel, but said none of them seem particularly immediate and most are of low to moderate probability.

Sydney-based hedge fund Morphic Asset Management Pty agrees. It would take a hawkish turn by a major central bank or a major escalation of the U.S.-China trade war to rouse currency markets from their slumber, said Geoff Wood, the firm’s head of macro and risk.

In the meantime, the fund is identifying overly complacent parts of the market to put money to work, including one-week implied volatility options for the Australian and New Zealand dollar cross. Bond markets are betting so heavily on rate cuts by the Reserve Bank of Australia ahead of a key jobs report on Thursday that it would take very little to fan volatility across the pair, he said.

“I think Aussie-Kiwi vol is relatively cheap at the moment,” Wood said.

Approaching Limits

For currency-focused funds, the lack of price swings can be particularly hard. The Citi Parker Global Currency Manager Index, which tracks the performance of 14 forex programs representing nine distinct investment styles, has declined to its lowest level since 2003.

Japanese hedge funds are arguably some of the most experienced investors in navigating depressed currency swings. The yen has the lowest one-month implied volatility across the Group-of-Ten currencies after the Swiss franc, as ultra-loose monetary policy continues to saturate Japanese markets.

Tatsuhiro Iwashige, chief foreign-exchange strategist at GCI, said some Japanese investors are willing to snap up riskier assets including corporate bonds and private equity investments to beat the volatility dearth. The firm, which oversees $1.2 billion in assets, is also using commodity trading advisers to invest across bond futures and currencies.

But even the Bank of Japan can’t keep volatility at bay forever, money managers say. For now, spurts of short-term yen price movements provide hedge funds such as Tokyo-based Whiz Partners Inc. windows to trade.

“This situation where volatility has been compressed this low is gradually approaching its limits, and this risks triggering sharp moves,” said Naoki Iwami, chief investment officer of global fixed-income investment. “This could happen separately from the interest rate world, which is under the BOJ’s control.”

To contact the reporters on this story: Ruth Carson in Singapore at rliew6@bloomberg.net;Chikako Mogi in Tokyo at cmogi@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Joanna Ossinger, Anil Varma

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