In a time when underperforming hedge funds - that would be most of them - are doubling down in hopes of undoing recent losses and catching up to the S&P, and avoiding a flood of redemption requests, one fund decided to take money off the table.
Rhicon Currency Management - a $700 million FX-focused hedge fund - closed out most of its positions roughly three weeks ago, according to managing director Peter Jacobson. The fund’s intra-month strategy is “completely flat,” while roughly half of the money in its one-week-or-less book is invested, Bloomberg reports.
Why? One simple reason: according to Jacobson, "nothing looks compelling."
The refreshing honesty from the hedge fund manager, who unlike his peers does not try to justify his fees by being invested at all times, comes amid recent turmoil in the US stock markets which however has failed to inspire volatility in the $5.1 trillion-a-day foreign exchange market, making life for traders especially difficult. With the "risk off" Yen refusing to act as a "risk off" currency - that honor has now been handed over to the Chinese Yuan, however good luck shorting it with the PBOC occassionally pushing overnight rates to a level that destroys all shorts - and the euro sliding as European growth has slowed to a crawl, Jacobson is steering clear. As for the US dollar, Rhicon believes won't take another leg higher unless benchmark 10-year Treasury yields spike to 3.3 or 3.4%.
Jacobson said the firm doesn’t often completely shut down its positions. However, in recent years it's become a more frequent occurrence as extraordinary monetary stimulus on the part of global central banks compressed volatility, not to mention made a mockery of fundamentals-based trading.
"Not trading is actually a trade decision," said Jacobson. "I don’t see anything that makes sense to me, so there’s absolutely no reason why I should have positions on."
Trading decisions such as this have served Rhicon well in 2018, a year in which the hedge fund is up nearly 5% even as most of its macro peers have stumbled. That compares with a nearly 4% year-to-date slump in a BarclayHedge index of currency trading programs, following a record 11% plunge in 2017.
According to Bloomberg, Rhicon was previously bullish on the dollar, a profitable trade for much of 2018 as the greenback gained over 7% since mid-April. In May, Jacobson also turned bearish on the Euro, expected the bulk of the dollar’s gains to come against the euro, a good trade as the common currency fell as low as $1.13 in October from a seven-year high of $1.2555 in February.
Now, however, the narrative is less clear: "With a four percent correction in equities, you would have thought that risk-off currencies would perform really well," Jacobson said. "So I’m in a holding pattern until things become more clear."
Looking ahead, Jacobson believes that should stocks continue to churn and a “real sense of panic” bleed across markets, his most likely next trade would be to short the USDJPY, even though the Yen has stubbornly refused to trade a risk-off currency in recent quarters.
In the meantime he’s content to sit the market out and keep his powder dry.
“There is always another trade, you just have to wait for it. But if you’re losing money, you may not have enough capital to trade that in the end,” he said. “So just be patient.”