FX Concepts, the $7.7 billion New York currency manager, is planning to launch its incubated fixed-income absolute return strategy to investors as a pooled fund later this year. Managing Director Daniel Szor said the strategy will also be available via managed accounts for clients prepared to invest at least $25 million.
The fixed-income fund will be the firm’s first non-currency offering. The strategy launched internally in November with around $100 million of proprietary capital from the firm’s Global Financial Markets Fund. It trades futures via the fixed-income derivatives markets, focusing on the G-10 at present but with plans to expand to cover the G-20. The strategy returned 6.06% in January, before fees. Simulated backtests for the strategy returned 0.82% for 2005; 18.80% for 2006; 30.60% for 2007; 24.57% for 2008; and 8.78% for 2009.
The firm is beginning to approach U.S. investors and is finalizing marketing presentations to use during a tour of Europe in the spring. FX Concepts plans to launch a pooled fund by mid-year and Szor said the firm is looking into making it Ucits III compliant.
The firm is considering offering two versions of the strategy with different target levels of volatility, probably around 7-8% and 17-18%. Szor said the firm is undecided on which version will launch first.
FX Concepts had a decidedly rocky year in 2009, with losses across the board. Global Financial Markets was down 36.82%, compared with a positive 41.88% return in 2008. The FX Concepts Global Currency Fund was -18.26% in 2009 after returning 11.41% in 2008; its Multi-Strategy Fund dropped by 19.80% after a 11.54% return in 2008; and the nascent FX Concepts Volatility Program, which launched in September, ended the year with a 6.25% loss (the vol strategy has since recovered thanks to a 7.30% return in January).
Jim Conklin, head of research, noted that the firm might have been expected to post good performance for 2009, since its strategy combines trend and carry, and “the dollar trend went in a straight line while carry went straight up.” But he described 2009 as “something of a perfect storm,” in which three factors coincided to hurt FX Concepts’ performance.
The firm did catch some of the dollar price action, but it was also trying to catch many other trends worldwide. The program “was simply never designed nor intended to only capture the seemingly obvious market trends observers noted,” Conklin wrote in an email.
The firm’s systematic process emphasizes the more exotic, less-monitored currency pairs, a universe of 32 currencies outside of U.S. dollar, providing a possible 528 pairs to choose from. Non-dollar trades across the board “chopped around quite a bit and made the relatively high-frequency trends [the program] follows especially unprofitable,” Conklin explained.
In addition, the uniformity of price action after the collapse of Lehman Brothers meant that high correlations between currencies continued long after volatility subsided, said Conklin. The firm’s systematic program perceives non-dollar trades through correlations, and as a result these trades ended up receiving large risk allocations, which hurt the program when their perceived correlations turned choppy.
Conklin said the firm has since built new portfolio construction processes that are simpler, more robust, and place less emphasis on non-dollar trades, enabling the firm to shift more into dollar pairs and away from exotic pairs when necessary. The program made money in January and is up so far this month, he said.
—Robert Murray
More info: FX Concepts fund performance.