The five-year drought for currency investing claimed a major victim in October after FX Concepts lost nearly all of its assets under management over the past six years.
But FX Concepts isn't alone. The length of the challenging environment is putting pressure on all currency managers, pushing them to diversify their businesses by adding strategies within the asset class and expanding beyond it.
Since the financial crisis of 2008, currency managers have struggled in an environment in which multiple countries' central banks have dampened currency volatility through a variety of tools, such as quantitative easing.
The Parker Global Currency Managers index returned -0.29% in September, with a year-to-date return of -4.65% as of Sept. 30. The index had an annualized three-year return of -3.66% through September, and an annualized five-year return of -1.98%
The difficult environment came to a head for FX Concepts LLC on Oct. 9, when the New York-based firm announced it would close its investment management business over the next few weeks. The firm will continue to operate its newsletter and FX overlay advisory business.
“The market has been moving toward vanilla-type instruments,” said John Taylor, founder and CEO of FX Concepts. “We, as a shop with a long record, had gotten away from vanilla. This year one of our products was up in the middle double digits, an overlay product, but it depended on options and that's a very rational and sensible vehicle, with our track record. On the other hand, that kind of product is too esoteric for most of the clientele, (and it) never was more than 5(%) or 6% of our total” assets under management.
Mr. Taylor said much of the firm's difficulty was finding institutional investors that would understand and embrace the more complicated vehicles the firm was introducing to counteract the underperformance of its larger strategies.
The firm's assets under management dropped to $661 million as of Sept. 26 from a peak of $13.5 billion as of Sept. 30, 2007.
“I think there was a tremendous boon in complicated currency management from 2008 and we were very successful in that period and bad times have made people like us look at different ways (of)managing currency,” said Mr. Taylor, “and then finding those fancy ways very difficult to sell.”
Mr. Taylor said there are four or five large searches by pension funds out there for simple currency overlay strategies.
“The fact is I believe we will appear elsewhere as an emerging somebody,” said Mr. Taylor. “The overlay business, you can't manage that when you're closing down so we have to find a partner. I would expect — knock on wood — that we will.”