Trend followers suffer in January

LONDON – A sharp reversal in risk appetite in mid-January meant currency managers using the trend strategy were the biggest losers for the month, indicates research from Royal Bank of Scotland.

The bank's naive simulations of currency strategies found trend followers returned –1.5% last month. “It is no surprise the trend strategy is the biggest loser, due to the sharp reversal of currency direction mid-month,” said Theodore Chen, in the quant solutions team at RBS in London. “Needless to say, the trend strategy ended the month short all currencies against the US dollar, except the yen, which had no position.”

Only commodities currencies the Australian and Canadian dollars, and the Norwegian krone, had long positions against the greenback sometime during the month. The biggest loser was yen, followed by the Australian dollar. “Only the euro, Swedish krona and Norwegian krone gained following this strategy,” said Chen.

The yield strategy made a small loss at – 0.7%, due primarily to the flight back into the US currency and away from the high-yielding ones. “Continuing the same theme from December, its biggest longs were the Australian dollar and Norwegian krone, which has remained the key driver for the losses,” explained Chen.

Meanwhile, the value strategy posted a gain on the month, at 1.2%, despite a decrease in the overall long position of the US dollar. The yen and Swedish krona were the only two other currencies that had long positions. The yen position and the short euro position were the biggest gainers. In fact, the Swedish krona was the only loser, the bank said.

The short volatility strategy took no positions with implied volatilities below a one-year average.