Why is everybody losing money in forex?

John Henry runs three currency funds that have lost between 10.3 percent and 21.5 percent so far this year, according to an article in the Financial Times (by Steve Johnson, July 31, 2006). The Man Group’s AHL Currency Fund lost 9.8 percent in the first half.

The Parker Global Index of forex managers shows that year-to-date in 2006 both systematic and discretionary funds have lost 2.96 percent, after making a measly 0.02 percent in 2005 and losing 0.01 percent in 2004 — but this followed average annual gains of 6.2 percent from 1999 through 2003 and 20.9 percent from 1986 through 1998. The only losing year from 1986-1998 was 1994. Excluding 1994 from this period, the average annual return was 22.52 percent.

The Parker Global Index (www.parkerglobal.com) is the best measure to use because it takes the reported returns of the various managers and de-leverages them to put every manager on the same footing, making the comparisons “risk-adjusted.” Obviously you can make more (and lose more) if you are using 30 times leverage as opposed to using three times leverage. The funds that Parker Global tracks are multi-million dollar funds that have high minimum investment amounts and are designed almost exclusively for institutional investors.

It’s ironic that just when the small trader was starting to get into the forex market over the past five or six years, everyone’s P&L went to hell in a hand basket. Of course there are exceptions. Every year, one or two managers make outsized returns. However, they can’t usually sustain high returns year after year, and many disappear from the scene by failing entirely, being acquired, or changing their names and methods.