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IPE special report May 2018

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Greenwich: foreign exchange becoming asset class

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GLOBAL – With volumes up almost 25% last year, foreign exchange is evolving into a separate asset class for “real money” investors, says Greenwich Associates.

The consulting firm says a new breed of professional investors – such as asset managers and hedge funds - are riding and generating a wave of market volatility in the global foreign exchange market.

It said growth in FX trading can in part be put down to cyclical factors. But it said: “Also contributing to the volume growth however, were the active trading strategies employed by hedge funds and asset managers looking to capitalize on these high volatility levels.”

“Financial institutions and non-traditional FX users are accounting for a growing proportion of foreign exchange trading volume,” said consultant Woody Canaday.

“The changes that are occurring in global FX have been so profound that the market has begun to evolve from its origin as a by-product of international trade and international capital markets transactions to an asset class in itself.”

Greenwich added that lacklustre traditional markets have encouraged an increasing number of “real money” asset managers and retail players to trade FX as independent asset class. But hedge funds were the most prominent members of this new breed.

“When you combine last year’s dollar volatility with the drastic ups and downs in pricing for commodities — which are priced in dollars — you produce nothing short of a currency volatility bonanza for hedge funds,” said Greenwich consultant Frank Feenstra.

But the firm said it was unclear if the new class of investor is a temporary development and a “secular change”.

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