When Hedge Funds suddenly develop a Taste for Emmental, Salmon, and Earl Grey

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  Martin Raab
  Investment-Stratege

Once again, it is the hedge funds that are otherwise better known for their investments in high-frequency trades – faster than you can spell “Nasdaq” or “Algo”. Some names are secretly shifting parts of their currency allocation and securities collaterals into Swiss francs, Norwegian kroner and even good old sterling. These collaterals are needed to hedge the hedge funds’ derivatives trades with the respective prime broker against fluctuations in value. Until now, it was customary to hold these collaterals in US dollars and corresponding US government bonds.

The official answers for the busy rebalancing of US hedge funds are: Diversification, currency hedging and defensive rebalancing. However, neither hedge funds nor prime brokers are willing to confirm a move away from US government bonds as collateral. The unofficial version is: “What the hell is going on in Washington?”. So they are starting to post collateral in currencies of more stable and unagitated markets. If US government bonds were to lose value as a result of the trade conflict, they would have to be hedged immediately. In other words, new securities would have to be deposited in order to avoid a partial unwinding of the derivative position, as the original collateral is no longer sufficiently secured. Nobody wants that.

It is already clear that if hedge funds are seriously interested in the Swiss franc, the Norwegian krone and even the British pound, it is high time to reduce positions in US dollars. Sad but true! For investors with a strategic asset allocation, this is the latest wake-up call to reduce the dominance of the US dollar. The good news for banks and issuers with good credit ratings: structures in CHF, NOK or GBP with capital protection-like features are the top sellers – at least for enlightened institutional investors.