--Neal Kimberley is an FX market analyst for Reuters. The
opinions expressed are his own--
By Neal Kimberley
LONDON, Nov 9 Among those peering most anxiously
over the U.S. "fiscal cliff" are arguably hedge fund foreign
exchange sales traders and their banks.
The implications of possible U.S. tax hikes for hedge fund
FX volumes and, by extension, profitability in early 2013 are
not pretty. There are implications for the wider market too.
Hedge fund flows are highly prized by banks given that their
size can potentially move the wider foreign exchange market.
Investors with capital gains on hedge fund investments may
be considering crystallising their profits before year-end,
given the chance U.S. tax rates will rise on Dec. 31 if the
White House and Congress fail to agree a compromise.
To fund those redemptions, U.S. hedge funds, many of which
close their books in November anyway, would probably adjust
their positions to ensure they had enough cash.
Given that investors have to give notice of redemption
perhaps three months in advance, any such a djustment m ay already
have largely occurred.
That might explain some of the dollar index's
strength as U.S. hedge funds would repay investors in that
That said, hedge fund sales traders might still expect their
clients to be net buyers of dollars until the books are closed.
Unfortunately for those bank hedge fund sales desks that may
be as good as it gets.
If investors in hedge funds do lock in gains, those funds
might limit their risk-taking in early 2013 until they have
greater clarity on whether clients will re-invest.
Following the U.S. elections, U.S. financial advisers are
focusing on lowering their clients' tax bills.
Conventional wisdom that people should defer taxes whenever
possible may be academic now that the elections have killed what
little hope the U.S. wealthy had for avoiding higher taxes next
Some have already decided that this is the right time to
take profits on their invested time and investments.
If that were to mean a muted start to 2013 in FX trading by
the hedge fund community, that would put a real dampener on the
prospects for those bank sales desks covering that segment of
(Editing by Nigel Stephenson)