Last year wasn’t a great year for professional currency managers — in fact, it was their first down year since 1994 based on the Barclay Currency Trader Index — but that doesn’t mean many traders weren’t able to extract gains from the market. A few even managed to post some pretty remarkable numbers.
In an industry that includes traders managing a few hundred thousand dollars on a proprietary basis to those managing hundreds of millions of dollars, it’s difficult to make apples-to-apples comparisons of all currency managers; trading hundreds of millions of dollars is a different breed of horse than managing a few million. Accordingly, we’ll review the 2005 performance of two broad groups of currency managers — those managing less than $50 million dollars and those managing $50 million or more. It’s not a perfect dividing line, but it provides some basis for putting the numbers in perspective.
They show the top-five currency managers from each group ranked by Barclay Trading Group, Ltd. The funds under management range from $1 million to more than a half-billion dollars. Comparing the two tables highlights some of the distinguishing characteristics of large and small currency managers.
First, the returns of the smaller money managers ($1 million to $49.9 million) were, overall, roughly twice the size of those of the currency traders managing more than $50 million. One probable reason for this is that smaller traders generally trade more aggressively because they are attempting to make a mark in the trading world so they can become bigger traders. On the other hand, bigger traders get more financial reward for maintaining lower-volatility, stable returns; the fewer customer withdrawals they have, the more money on which they earn interest.
Interestingly, though, the larger traders’ drawdowns, while relatively low, were nonetheless larger on average than those of the smaller managers in. However, IKOS Partners currency fund had a triple-threat combination: the second-highest return for the year (19.85 percent), the second-lowest drawdown (1.5 percent), and the most money under management ($502 million).
Three of the five funds are operated by traders interviewed in past issues of Currency Trader: Clarkson Jones of second-ranked Monarch Capital Management (“Clarkson Jones: Art, science, and forex,” Currency Trader, December 2005); Mario Kelly and Darryl Swain of fifth-ranked Wallwood Consultants (“Wallwood Consultants practices what it preaches,” Currency Trader, November 2005); and Peter Panholzer of top-returning DynexCorp Ltd. (+52.96), featured in the November 2004 issue of Currency Trader (“Peter Panholzer: Currency system architect”).
It ranks the trading programs from Tables 1 and 2 according to their return/drawdown ratios that is, their 2005 returns divided by their 2005 worst drawdowns. This measure, while hardly definitive, offers a quick way to gauge profits relative to the risk taken to achieve them.
Among the larger traders — those managing $50 million or more — the rankings remained the same except the funds with the fourth- and fifth-highest returns switched places when ranked by return/drawdown.
The rankings of smaller currency fund managers changed much more. The fund with the fourth-highest return — Spot Forex Management jumped to first place in the return/drawdown rankings, thanks to its miniscule 2005 maximum drawdown of 0.50 percent. The Dynex Corp. Percival fund, which had the highest 2005 return, moved down only one notch to No. 2. Previously fifth-ranked Wallwood Consultants moved up to No. 3.
The DynexCorp Percival program is based on the Market Sentiment Strategy developed by John Percival, according to Panholzer. Percival, who works in an advisory capacity with Panholzer, posted huge returns with the approach in the 80s and 90s. Panholzer says the Market Sentiment Strategy is longer term in nature compared to the “short term trading fashion of the day,” and describes it as a moderate-leverage program that does not protect its positions with hard stops.
“It probably has the most impressive currency track record between 1989 and 1996, when John Percival’s funds under management at Chescor, London, UK, rose from $100,000 to $300 million, with an average annual return of 30 percent,” Panholzer says. Percival is now retired in France and prefers to trade only for himself. He also publishes Currency Bulletin in conjunction with DynexCorp and Panholzer Advisory Corp., who offer the Market Sentiment Strategy exclusively to their clients. The Percival fund’s discretionary trading principles were laid out in Percival’s out-of-print book The Way of the Dollar, which is available only in an online version to investors, according to Panholzer. “It’s regarded by many as an ‘underground classic’ on currency trading,” he says.
Overall, Panzholzer’s funds ended up 10 percent before fees, 6 percent after. Panholzer is optimistic about the immediate future of the forex market, believing a relatively sustained period of good performance could be at hand for currency managers.
“The most popular currency benchmarks, the Parker and Barclay indices, have been around for 20 years, and bad years occur cyclically almost exactly every five years,” he says. “Why they would pop up so regularly every five years is still a mystery and invites interpretation. Given the amazing long term regularity and reliability of annual returns over the past 20 years, it seems extremely opportune to exploit these cycles and invest after a bad year, expecting four good years to follow — if the pattern holds. This year may be the start of the next profitable five-year cycle.”
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