Fund Managers Return to FX, But Are They Here to Stay?

With volatility returning to FX, fund managers have returned to the asset. But will they stay for long?

Until recently, the foreign exchange (forex) markets experienced a sustained period of low volatility, which saw fund managers move away from the industry. However, with the coronavirus pandemic giving FX a second wind, fund managers are returning to the space – but are they here to stay?

Fund managers thrive in volatile markets, however, following the 2008 global financial crisis, central banks across the world implemented stimulus programs to try and support their struggling economies.

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Natallia Hunik of Advanced Markets
Natallia Hunik, Chief Revenue Officer at Advanced Markets Group
Source: LinkedIn

This, in turn, led to quieter currency markets and took away FX volatility which fund managers need to deliver performance. As highlighted by Natallia Hunik, the Chief Revenue Officer of Advanced Markets, during this time, funds that specialised in currencies started to wind down and a few large firms turned their back on the asset and moved towards more attractive assets, such as global equity markets.

“In another jolt to the already under pressure industry, the Swiss National Bank’s removal of the Swiss franc’s peg against the euro on 15 January 2015 severely impacted hedge fund returns, with assets under management falling even further. In addition, flash crash events began to periodically occur in currency markets, adding more fuel to an already burning fire,” Hunik explained to Finance Magnates.

COVID-19 saves the day

However, the COVID-19 pandemic has caused large currency swings, with volatility picking up steam in the last week of February and peaking in March. Although volatility has since lessened, in a recent webinar with Finance Magnates, panellists from Saxo Markets UK, Swissquote, oneZero Financial Markets and Hunik herself, all agreed that volatility is likely to stay at least until the end of the year.

As highlighted by Hunik in the webinar: “Due to all the economic effects following the pandemic and all the prices that have spilled over into other industries such as commodities, we do see that more fund managers are looking to implement active FX strategies to take advantage of the currency movements.”

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Furthermore, in a recent article published by Finance Magnates and written by Natallia, she pointed out that recent market statistics show that hedge funds outperformed the market in March 2020 when the coronavirus pandemic halted the global economy. However, it is worth noting that the performance vastly differs depending on the type of fund, with managed futures funds showing the best results.

“Currently, FX volatility index (JP Morgan VXY G7 index) is at 7.9 level. Over the past four years, it ranged between 5 on the low and 16 on the high. Whereas, VIX (measures stock market volatility) is in the upper 20s level and Oil (OVX) is in the 100-300 range. If fund managers want to play the market, the current levels of FX volatility are offering remarkably good value,” Hunik told Finance Magnates.

Will fund managers stick around?

Although fund managers are returning to FX, attracted by the higher levels of volatility, can we expect them to stick around as volatility lessens once the pandemic and its after-effects, no longer cause such large swings in currencies?

According to Hunik, emerging market currencies could keep fund managers within the FX space for longer: “The real macro play I think is in Emerging Markets FX as many emerging economies cannot print their way out of a crisis like Japan, US and the EU,” she said.

“EM currencies have rather significant moves (probably, not as dramatic as 10-20% moves) which allows managers to play the macro story in a smart and stable way.”

“As FX volatility is lower, you will not get butchered like in equities or commodity markets. If you are on the wrong side in equities, you are out within minutes, if you are wrong in Oil – seconds, in FX – you got some time to make it a sensible trade (provided you trade at reasonable leverage).  As we see investors pulling away from volatile markets into hard assets, FX is another avenue to explore for sure.”

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