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Forum Global Opportunities up 107% YTD on big short yuan bet
China’s losses have been one hedge fund’s gain – big time.
Forum Global Opportunities Fund, the global macro hedge fund run by Ray Bakhramov, jumped 60.21% in the month of August. It is now up 106.71% year-to-date, putting it on track to post its first year in the green since 2011, according to a letter to investors reviewed by ValueWalk.
The increase was driven by a 38.2% gain in the fund’s forex investments. The firm has a long-standing bet against China’s yuan, which the country devalued last month. It also won on short bets against the Taiwanese and Singapore dollars as well as the S&P 500, DAX and Nikkei indices.
The firm has operated in recent years under the belief that high levels of intervention from central banks has created severe distortions within financial markets, suppressing volatility and posing a flight risk to assets. It has held that at some point, the markets would enter a normalization phase in which distortions would correct – essentially, what happened in August. And Forum doesn’t think the ride is over yet.
Forum Global Opportunities on yuan bet
“Given our high conviction that certain asset prices had become massively inflated as investors piled into risk assets, volatility was suppressed to record lows, and underlying macroeconomic fundamentals continued to deteriorate, we heavily weighted our portfolio with long volatility, highly convex structures that would perform well as we moved into a normalization period that we believed would be characterized by sharp and abrupt adjustments,” the firm wrote in its August note to investors. “While our portfolio has been able to capture these recent market moves as evidenced by our recent performance, we believe the recent spate of volatility is merely the first adjustment in a longer normalization period for global markets. We expect to see continued heightened volatility in the current market cycle, punctuated by discrete waves of adjustment as these distortions correct.”
Forum makes the argument that the current normalization process will be “significantly larger and longer” than previous cycles. It points to the acceleration of causal factors behind adjustments – slowing emerging market growth, commodity-led deflationary pressures and diverging global monetary policies – and uses China as an example:
In China, intervention to slow the yuan’s depreciation has tightened financial conditions and accelerated capital outflows requiring further intervention. Cutting policy rates to offset financial tightening only increases fund flows to state-owned enterprises in over-supplied sectors, deepening deflationary pressures and pushing real rates higher. Across commodities, aggressive monetary easing has lowered cost curves via easy credit and local currency depreciation, boosting supply growth and negatively impacting pricing.
Forum Global Opportunities on a changing market
The fund also says market structure has transformed, with emerging markets nearly doubling their share of global GDP from 1997 to 2013, and that algorithmic and hedge fund trading “have changed market funding and behavior by linking multiple market segments into single trading strategies and amplifying ‘herding’ effects and liquidity-driven market imbalances during computer stampedes.”
Founded in 2001, Forum is one of the leading investmen