(Bloomberg) -- Here's something that U.S. Treasury Secretary Steven Mnuchin might like.
Swedish hedge fund Brummer Nektar is now shorting the dollar, anticipating a “strong momentum in the short run,” said Patrik Olsson, chief investment officer at the fund, which manages about 25 billion kronor ($3 billion) from London, Stockholm and Singapore.
Mnuchin last week triggered the dollar's steepest slide since March by saying “a weaker dollar is good” for U.S. trade. Other funds are betting against the dollar on the view that President Donald Trump's “America First” policy will put pressure on the U.S. currency. Though Trump has since sought to persuade markets he believes in a strong dollar, the Mnuchin comments seem to have stuck.
Dollar Declines as Trump's Speech Fails to Offer New Specifics
Along with other global macro hedge funds that have lagged behind the industry recently, Nektar is now betting a return of volatility will improve its fortunes. It last year posted its second loss in two decades.
“Volatility has already increased this year from record-low levels,” Olsson said by phone on Monday. “It will continue higher.”
Global macro hedge funds, which bet on broad swings in markets, have been struggling with record-low volatility in past years. But this year, there are signs volatility is returning, with U.S. interest rates rising and the dollar weaker. The Deutsche Bank Currency Volatility Index has risen in the past weeks from the lowest level since 2014.
“The market hasn't been free to set the right price on a lot of asset classes, when this is changing the prices will be more volatile,” Olsson said. “Several central banks are cutting QE and the U.S. central bank is shrinking its balance sheet. Central banks are also normalizing rates which will result in higher term premiums and implied volatilities in markets over time.”
The fund relies on discretionary management to deliver an absolute return uncorrelated to equity and bonds by taking hundreds of underlying positions.
Long Krona, Krone
Besides being tactically short the dollar, its longer term views are that the Norwegian krone and the Swedish krona will strengthen against a basket of currencies along with higher rates in most G10 markets.
“Rates are generally are at a too low level,” Olsson said. “The risk premiums aren't high enough to make these markets attractive. Suppressed volatility has been related to the imbalance between supply and demand of interest rate products creating asset bubbles in certain other sectors like real estate.”
The fund had a loss of 0.5 percent in 2017. Its average annual return since starting in 1998 is about 10 percent. As a hedge the fund is always long volatility.
“One of the reasons we're still in business after 20 years is that when there's been periods of volatility we've been able to increase risk instead of decreasing risk,” he said. “Our clients want an uncorrelated product. When they lose money on passive investments they expect Nektar to make money.”
The complacency that gripped markets last year now provides opportunities for Olsson's fund to make bets.
“This year will bring more volatility between different markets,” he said. “We try to exploit that. With rising volatility a lot of strategies will benefit -- rates, currencies and macro trading.”
To contact the reporter on this story: Jonas Cho Walsgard in Oslo at jchowalsgard@bloomberg.net.
To contact the editors responsible for this story: Jonas Bergman at jbergman@bloomberg.net, Tasneem Hanfi Brögger
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