DJ Dollar's Plunge Hurts Hedge Funds Holding Bullish Bets

Many hedge funds managed to exit their bets on the dollar before its tumble Thursday.But an unfortunate few didn't make it out in time. The dollar plunged 2% against the euro to $1.419 Thursday afternoon in New York - its biggest one-day percentage drop since July 2010 - and saw even steeper losses against the Australian dollar and other currencies.
The drop came as European leaders secured a deal to reduce Greece's crushing debt and expand the firepower of their rescue fund for struggling members of the euro-currency zone. Meanwhile, the U.S. economy expanded by 2.5% in the third quarter, curbing fears of recession. However, funds had scaled back their bullish bets on the dollar in October, after piling into the currency the month before, when the economic outlook looked bleaker.
There was an "aggressive reduction of 'long' dollar positions," in October, according to JW Partners, a research and advisory firm for currency hedge funds. A long position is a bet the dollar's value will rise against other currencies.


Hedge funds have also been cutting back on trading currencies in general. A measure of exposure to currencies across 20 currency hedge funds dropped to 70 on Thursday from above 200 in April, the lowest level since early summer 2009, according to Parker Global Investors, which invests in currency hedge funds.
Yet some managers, especially those that use mathematical models to make trades, stayed in dollars. Their rush to sell as losses mounted on Thursday likely contributed to the dollar's rout, analysts say.
The dollar's move "probably owes to the fact that institutional accounts are still modestly long dollars," John Normand, head of global foreign-exchange strategy at J.P. Morgan Chase Co . in London said in a report.
The amount of long dollar positions hit a near-record in late September when the dollar was surging, according to data from J.P. Morgan . Long positions subsequently collapsed by some 70%, as the dollar retreated.

Any losses taken Thursday would be another black eye for "macro" hedge funds that make bets on global markets and economic trends.
Macro hedge funds that take their cues from models in particular have been relatively late in reducing bullish dollar bets, a hedge-fund trader said.
"They're still catching up," the trader said.
It hasn't been easy for macro hedge funds generally. The flagship fund of FX Concepts, one of the world's biggest currencies-focused managers, was down over 10% recently, according to someone familiar with the fund's performance. The Fortress Macro Fund, run by hedge-fund giant Fortress Investment Group , was down around 8% earlier this month, according to investors. It's not clear how these funds fared in the recent market moves.
Several hedge-fund traders and analysts said Thursday's moves could prove temporary, giving funds in the red a chance to make back their money.

The plans that came out of Wednesday's European debt crisis meeting were short on details. That leaves room for investor doubts about the health of the euro zone to return.
"I'm looking to 'fade' the move," which means making bets opposite the rally, early next month, said George Papamarkakis, co-founder of North Asset Management LLP , a London-based fund that manages some $200 million.
Papamarkakis dumped his bullish bet on the dollar several weeks ago, profiting from the currency's upward surge. However, he started buying dollars again and selling other currencies like the Australian dollar in recent days.

A trader at another hedge fund said he doesn't expect the euro to rally much further.
"I am flummoxed by the level of market stupidity," the trader said, referring to investors cheering European leaders' latest moves to stem the debt crisis. "The more I read, the more I want to sell" the euro.
J.P. Morgan 's Normand said a "liquidation of remaining dollar 'longs' could extend the dollar's decline ... but this isn't a move worth chasing" by selling dollars.
And investors are still "shorting," or taking negative views on, the euro, Deutsche Bank currency analyst Alan Ruskin wrote in a report.
While the euro and other risky currencies rallied against the dollar Thursday, investors continued to buy currency derivatives to protect themselves from a sudden fall in the euro, based on signals in the options market.

Dow Jones - 27.10.11