The collapse of FX Concepts, once the world's biggest currency hedge fund, is symptomatic of the dramatic decline in a once-profitable sector that faces another tough year in 2014 at the mercy of central bank policy.
U.S.-based FX Concepts once managed more than $14 billion, but a combination of increasingly difficult market conditions and self-inflicted wounds killed it off earlier this year.
If that fate can befall the king of the jungle, the smaller beasts will be reminded of their own mortality.
The compression of interest rates across the developed world to virtually zero has wiped out the so-called "carry trade", where investors borrow a low-yielding currency and sell it to buy a higher-yielding one.
And many central banks, as part of their crisis-fighting and growth-boosting armoury, have explicitly or implicitly tried to weaken their currencies, which has led to fewer well-defined long-term trends in currency markets, a trade that many computer-driven funds specialise in.
The result has been a slump in total assets run by quantitative currency funds, from around $35 billion at the start of 2008 to approximately $6 billion this year, according to the Bank for International Settlements.
"It's been tricky. The problem is carry and momentum - neither strategy is working well. They've done quite poorly," said a London-based macro hedge fund manager.
"The challenge is to make sure you make money on your good trades and not lose too much on the bad trades. You let the good 50 run and try to limit the losses on the bad 50," he said.
This year has proved particularly troublesome. Many managers were too bullish on the dollar, expecting the Federal Reserve's tapering of its bond-buying in September rather than December. And some were caught out by the rise in sterling and the euro.
Already a number of funds have closed or suffered losses.
Brevan Howard, one of the world's biggest hedge fund firms, recently closed its currency fund, which held around $1 billion last year. The fund fell 2.3 percent last year and 6.4 percent this year to end-October.
The Ortus fund, which is run out of Hong Kong and tries to make money from cycles in global currencies, is down 15.6 percent this year, having lost 17.3 percent last year.
Source: Reuters
