LONDON – Currency-trading strategies are losing the most in two decades as the volatility that’s boosted volume and profits for investment banks erodes the ability of investors to make money.
Three out of four Royal Bank of Scotland Group indexes of foreign-exchange trading strategies are down this year, including a 2.7 percent drop through September for its carry trade index. Deutsche Bank’s dollar-denominated Currency Returns Index has fallen 3.4 percent, the biggest drop since a 4 percent slide in 1991. The Stark Currency Traders Index and the Barclay Currency Traders Index have declined by 8.6 percent and 0.4 percent.
Whipsawed by slowing global growth, central banks fighting currency gains, and swings between optimism and despair over the 17-nation euro area’s debt crisis, traders are reeling from losses in an environment that should have favored them.
“What’s really frustrating is that we’re supposed to do well in a lousy world market,” said John Taylor, the founder of New York-based FX Concepts, the world’s largest currency hedge fund.
Taylor said in an Oct. 19 interview in London that he has lost 12 percent this year and assets under management fell to $5 billion from as much as $8 billion. “We’re doing very badly.”
Losses started as early as the first week of January, when Chile’s central bank said it would buy $12 billion to stem a rise in its peso, Taylor said. The peso tumbled 6 percent that week, erasing most of its 8.4 percent gain from last year.
“Our position was relatively large, it was 8 or 9 percent of our total assets, and there was no way to get out,” Taylor said. “What was bad about it was that a couple of days later Israel did the same thing, then a week or so after that South Africa did the same thing, then after a little bit more study Brazil did the same thing. We got walloped every time.”
The losses are a blow for specific types of currency funds that seek to lure investors with trading techniques that are designed to provide returns in economic declines as well as in periods of growth.
Losses have not kept revenue for brokers from rising. CLS Bank, the New York-based operator of the biggest currency- trading settlement system, said it handled a record $5.21 trillion a day in September. That was a 23 percent increase from the same month in 2010. Deutsche Bank, the world’s biggest currency trader, said Oct. 25 that it had record revenue from foreign-exchange trading in the third quarter.
