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Portfolio > Alternative Investments > Hedge Funds

Hedge Funds Find FX Less Special in 2005

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GREENWICH, Conn. (–Foreign exchange trading volumes increased by almost 14% in 2005, according to a report by the financial services consultants Greenwich Associates. The report was based on research conducted among 1,549 top-tier users of foreign exchange services at large corporations and financial institutions in Europe, North America and Asia between August and November 2005.

Although robust, the rise represented a sharp slowdown when compared to the 25% increase recorded in 2004. While increased hedge fund activity fueled much of the 2004 growth, rising by over 50% in the period, the 9% increase registered in 2005 represented a drag on growth figures.

The 2005 numbers were boosted by a 48% jump in volumes among fund managers and pension funds, whose proportion of total global trading rose from 15% to 20%. Volumes in FX swaps among these users rose by almost 50%, an increase which, said Greenwich consultant Robert Statius Miller in the report, was mainly due to managers who were already using interest rate swaps stepping up their activity sharply.

Greenwich consultant Woody Canaday also emphasized the 40% rise in activity at firms considered as entry points for retail trading activity into institutional markets. In the report, Mr. Canaday observed that “the aggregation of these retail flows is emerging as an important source of FX trading activity.” In particular, e-trading volumes reported by users surveyed in this category increased by 70% in the period.

Differences in sector-to-sector growth were mirrored in the geographical numbers. U.K. volumes increased by a massive 40%, with 20% gains in U.S. trading. Continental Europe rose by an anemic 7% and Japan was flat, while Asia ex-Japan volumes declined by more than 10%, and Canada by around 8%.

Interest rate derivatives trading remained stable, with volumes stifled by low long-term interest rates, a flat yield curve and regulatory developments such as IAS 39 and FAS 133. The fact that many banks have now integrated interest rate derivatives functions with broader debt operations may be indicative of a potential reduction in the focus on these products.

Contact Bob Keane with questions or comments at [email protected].


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