Hedge funds' bets on strengthening dollar pay off

Hedge funds have enjoyed their best quarter relative to US equities in four years as big bets on the rise in the US dollar paid off for some of the world's best known managers, helping the industry break years of mediocre returns.

Funds including Ray Dalio's Bridgewater, Louis Bacon's Moore Capital and Alan Howard's Brevan Howard have all enjoyed strong starts to 2015, after making the correct call that the US dollar would rise sharply against other major currencies.

Managers said the trade will remain a cornerstone of macro hedge fund portfolios in the coming months, despite a recent run of poor economic data from the US, because the Federal Reserve continues to edge towards tighter monetary policy while Europe and Japan are in the midst of quantitative easing.

"We all know the US economic story, we all know the European economic story and we all know that monetary policies are out of sync," said Ray Nolte, chief executive of SkyBridge Capital, a fund of funds with stakes in many of the largest hedge funds.

The widely held bet on the dollar meant hedge funds enjoyed their best quarter of performance relative to the US S&P 500 index since 2011, according to the data provider Hedge Fund Research.

Mr Dalio's Bridgewater, the world's largest hedge fund with $169bn of assets under management, saw its Pure Alpha fund rise about 14 per cent up to the end of March, said people familiar with the fund.

Louis Bacon's Moore Global fund is up about 4 per cent, while Brevan Howard's Master Fund has rebounded from its first losing year in 2014 to be up close to 3 per cent.

Other managers that enjoyed strong starts to 2015 include Andrew Law's Caxton, up almost 7 per cent and Paul Tudor Jones's Tudor Global fund, up almost 5 per cent.

Managers of so-called macro hedge funds - those that make bets across currencies and interest rates based on the direction of the global economy - have gone from cursing central banks to celebrating their diverging policies, which have opened up the chance to profit from big investment shifts across the world.

"Divergent monetary policies in Asia and Europe versus the US are more constructive for macro trading than convergent policy and asset classes all moving together," said Ken Tropin, founder of Graham Capital Management, which runs both computer-driven and discretionary macro funds.

"We are expecting to see continued dollar strength, although we do think it is possible we will see a couple of corrections as we move closer to parity [between the dollar and the euro]."

Mr Tropin's Graham's trend-following fund rose 9 per cent in the first quarter thanks in large measure to the stronger dollar, said people who have seen a report to clients.

The Newedge Trend Indicator, an index designed to match trend-following funds, is up 9.2 per cent year to date.

Mr Nolte said that both active managers and trend-following funds were still positioned for a rising dollar, but active managers may reserve part of the fund to hop in and out of currencies. Greater volatility is expected over the next few months, because the exact timing of Fed tightening depends on economic data.

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