Hedge Funds and Forex

Forex trading is more difficult than it seems.

The majority of people who try it end up losing unavoidably, which is even worse for those who try the merry go world of dealers: day trading.

The only way you can win in the long run in Forex – I am talking about traders – is by “betting” for the long term moves, that is to say going with the trend.

We can see this clearly in the hedge funds industry, which are not really market makers but have to make their money by trading, namely following the trend in long term trades based in macro principles like interest rates and carry trade issues.

The carry trade always has variations depending on time and asset going back and forth between the different currencies as GBP, USD, JPY, EUR, and etcetera.

For example, after 2008 it has been very complicated to trade Forex following the trend.

As you can see the years without trends are usually followed by years with trend

The only pair that moved significantly after those years is the Yen, which fell strongly against the rest of the currencies.

In the cases of the Euro, Dollar or Pound the markets were dead for many years until the latter collapse of the Pound and continuing strength of the Dollar.

The GBPUSD finally gave a good opportunity with the Brexit but apart from that it is a pair we had better avoid for trading.

All in all, from 2008 to 2013 hedge funds related to Forex suffered very badly without trends and many markets in range.

FX Concepts and the end of the Forex trend

FX Concepts used to be the biggest Forex hedge fund.

It used to depend on trending trading strategies to make its profits, although as trends came to and “end” after 2008, the results were very bad and its investors left the business, going bankrupt thereafter.

Not even the great Forex managers can stand the hits of this difficult market, especially when central banks destroy the market trends in their madness to zero interest rates.

When there is trends we can make some money in those markets, but the trends have to be good, like the ones before 2008.


Trends like those of the EURUSD, GBPUSD, AUDUSD, USDCAD, NZDUSD, GBPJPY, AUDJPY, CADJPY, and etcetera.

Many of those pairs were lost after 2008 without clear direction.

For example if you analyze the long term chart of the NZDUSD you can see how it had very good trends since the 90s. Very good years for Forex trend trading, without a doubt.

In this respect I remember the words of Bruce Kovner in his interview in “The Market Wizads”, in which he said that one of the best markets for trading big volume was the Forex market since futures could not handle very large orders efficiently.

The years that Kovner was trading Forex were quite different from the years going from 2008 to 2012, which were a disaster for Forex traders.

Many years had to pass after 2008 to see significant moves in some pairs like the yen and the dollar.

I suppose that some Forex hedge funds had good performances in those years but the sector was quite reduced compared to how it was prior to 2008. In 2013 the automated Forex hedge funds represented only 2.7 of the whole market, compared to 11.4 of previous years.

Anyone interested in the Forex markets should learn some lesson from this. Some lessons like:

  1. The most important: that making money in Forex doing trading is very difficult. More difficult than with stocks, which, at least, have a better long term trend, plus more possibilities.
  2. The Forex industry hedge funds trade looking for trends, even with their mathematics programs. The trend is the trader best ally.
  3. If most hedge funds trade that way and looking for big moves, why do we think that we will succeed by doing day trading in the Forex market? The only ones interested in you doing short term trading are the brokers and dealers.
  4. Those who have some success doing day trading are not traders but market makers or, as I call them, “spread eaters”. When you hear that Goldman Sachs or XXX made 580 out of the last 581 days is because they were doing a dealer, market maker business, not as traders. The traders, in aggregate were the ones who lost 580 days out of 581.

Regards and good trading.