Hedge funds: Not just carry-traders!

First, Sushil Wadhwani closed

his flagship $1 billion global macro hedge fund, which lost money in 2006. Reports

Edward Chancellor

at Breaking Views:

Wadhwani believed that the gaping US trade deficit would push down the value

of the dollar against the yen. That hasn’t happened – yet. He also expected

Treasury bonds to fall as long-term U.S. interest rates climbed. These failed

macro bets produced disappointing results.

Now, SemperMacro looks like it’s headed

in the same direction:

SemperMacro, which is part of London-based Fulcrum Asset Management LLP,

was set up by Christian Siva-Jothy, a former proprietary trader at Goldman

Sachs, and Gavyn Davies, who helped lead the BBC, Britain’s state broadcaster,

from 2001 to 2004 and was chief economist at Goldman Sachs for three years.

According to people familiar with the matter, SemperMacro lost 15.7% in 2006,

partly from losing bets on the U.S. dollar and Japanese stocks, though returns

were consistently negative throughout the year. When an 18-month lockup ended

in December, many investors took their money, taking the fund down to around

$500 million from a peak of about $1.5 billion.

This is all good news for people who say that hedge funds spread risk and that

for every fund which is on the winning side of a trade – say, the short-yen

carry trade – there’s another fund which gets burned by being on the losing

side.

On the other hand, Brad

Setser has found an estimate

saying that the yen carry trade is as large as $1 trillion. There certainly

isn’t anything like that much money in global macro funds, even assuming that

those funds are long yen. And Nouriel

Roubini worries about the systemic risks posed by a disorderly unwinding

of the carry trade, a la 1998, contrasting "macho men" (Michael

Lewis, Julian Robertson) with the "wise folks" of "Summers,

Trichet, Stark, Rattner, Knight, Rhodes, Dallara".

I’m somewhere in the middle, and not only because I would never pick Charles

Dallara in an analysis fight with Julian Robertson. Obviously any unwinding

of global inbalances can, in theory, pose a systemic risk. And it’s the job

of central bankers like Trichet and Stark and Knight to worry about anything

which can, in theory, pose a systemic risk. But I still suspect that the next

crisis won’t look exactly like the last one. And I also suspect that the smart,

fast hedge funds are just as likely to benefit from an unwinding trade as they

are to lose their shirts.