Indices Show Positive Q1 Performance By Systematic Currency Fund Managers

Systematic fund managers benefited from the same January trends that helped boost foreign exchange earnings for US banks this past quarter (FXW, April 21), according to the results of the Parker and Ferrell FX indices, which track the performance of currency fund managers.

The top three performers in both indices were systematic programmes, with some of the companies showing up on both indices. However, discretionary traders fared better this year than the top-performing discretionary managers did during the same period last year (FXW, May 6, 1996).

The Parker FX Index, which shows the top three performers on both a reported and risk-adjusted basis, was up 5.11 per cent for the quarter on a reported basis and 3.41 per cent on a risk-adjusted basis. Of the 53 of 59 programmes reporting, 44 reported positive results. Meanwhile, the Ferrell FX Index was up 6.5 per cent for the quarter. The median return for Ferrell was up 5.9 per cent, while for Parker it was 3.64 per cent.

The Parker index reports two groups of top performers, one on a reported basis and the other on a risk-adjusted basis. The reported basis numbers are returns reported by the fund managers in the index. The risk-reported numbers are obtained by evaluating the amount of leverage used by the respective managers. Those who had little or no leverage are scaled up to a 5 per cent volatility while those who used large amounts of leverage are scaled down 5 per cent volatility.

For the first quarter, Parker reports that the top performer on a reported basis was Dean Witter of New York for its Currency Portfolio, up 23.59 per cent. The second best performance was achieved by Hyman Beck & Company of Parsippany, New Jersey, up 18.49 per cent. Tied for third were Tamiso & Company of New York City and St Louis-based Trendstat Capital Management, each up an estimated 17.77 per cent.

On a risk-adjusted basis, systematic traders took the top three slots as well, with Coral Rock Investments of Mount Pleasant, South Carolina taking the top spot with gains of 5.32 per cent. Second-best was Westport, Connecticut-based John W. Henry & Company, up 5.03 per cent, while third best was Dean Witter, up 4.85 per cent.

The top performer in the Ferrell FX Index was Hyman Beck, reporting gains of 18.5 per cent. Last year, when the index showed meager returns (an overall gain of 1.19 per cent for the period and a median return of 1.28 per cent), the top performer was a discretionary trader, reporting gains of 10.86 per cent. This compares to the top discretionary manager this year, Compucom Finance of Switzerland, which did not make the top three with its gains of 12.7 per cent.

The second and third best performers in the Ferrell index were John Henry and Tamiso, reporting gains of 18 per cent and 17.3 per cent, respectively.

These systematic traders benefited from the same upward trend in the US dollar in January and early February that many of the US banks credited for their strong first quarter performance, says Caroline Bentz, vice president at Parker Global Strategies. "In March, however, they gave back some of that strong performance," she says. "But due to a strong first two months, these traders were able to hold onto strong returns."

S. Waite Rawls, chief risk manager at Ferrell Capital Management, concurs, adding that "the difference between the 'winners' and 'losers' was wider in March, because of the choppy markets that presided. Success depended on whether you got the chop right".

In January, the Parker index showed systematic traders were up 4.27 per cent, going down to gains of 2.38 per cent in February, says Bentz. The decline continued for systematic traders in March, to a negative 0.39 per cent, but discretionary traders were still outperformed for the month, she adds.

In the period from January 1986 to March 1997, says Bentz, systematic traders have out-performed discretionary traders in nine out of those 11+ years on a reported basis. However, on a risk-adjusted basis they outperformed discretionary traders in only five of those 11+ years.

A partial explanation for the discrepancy in the two numbers is that systematic managers tend to be more volatile than discretionary managers, Bentz says. The standard deviation for the systematic traders between January 1986 and March 1997 was 19.9 per cent while for the discretionary ones it was 7.2 per cent.