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By Gertrude Chavez-Dreyfuss and Nishant Kumar
NEW YORK/LONDON Jan 15 Currency speculators and
global macro hedge funds with large short positions in the Swiss
franc are staring massive losses in the face after the Swiss
National Bank shocked markets on Thursday by removing a
three-year-old cap on the currency.
The move sent the safe-haven franc soaring against the euro
and the U.S. dollar at a time when more than $3.5 billion was
betting on more franc weakness, the largest such position in
more than a year and a half.
The damage from the Swiss franc's sharp moves comes as a
blow for macro hedge fund managers nursing wounds from nearly
four years of mediocre performance. Only days ago, the SNB
termed the 1.20 francs per euro cap the cornerstone of its
"You have these massive policies which forced all investors
to invest with the policy and then they remove the policy and
everyone is left high and dry," said Chris Morrison, strategist
for the $550 million Omni Macro Fund.
Data from the Commodity Futures Trading Commission released
Friday showed net short positions of 24,171 contracts on the
Swiss franc, the largest since June 2013. Adding in 662 short
option contracts gives a combined position of 24,833 contracts
or $3.5 billion at the current rate of around 0.87 franc to the
Global macro hedge funds that use fundamental analysis to
bet on the financial markets and represent $288 billion in
assets on the Lyxor platform had a net short position of 2.6
percent, indicating a loss given the currency move.
"Yesterday, we were doing fine. We were up 2 percent this
month, but with the SNB move, our gains have been wiped out,"
said Axel Merk, president of Merk Investments in Palo Alto,
California, which has mutual fund assets of about $300 million.
Merk said his funds were hurt by the SNB move, with two
short positions on the franc, one against the euro and the other
against a currency basket. He has since closed the short
position on the franc against the euro. But Merk further
increased his shorts on the Swiss unit against a currency
basket because he believes the risks on the franc and the Swiss
economy as a result of this move have dramatically increased.
Goldman Sachs, meanwhile, on Thursday closed its 'top trade'
recommendation of a short position on the Swiss franc against
the Swedish crown, with a potential loss of around
16.5 percent. It added that its current forecast for the euro
against the Swiss franc is under review.
The euro dropped as much as 30 percent below the 1.20 cap to
0.8500 franc per euro at one point Thursday before
rebounding to roughly 1.00, down 16 percent. The dollar plunged
to 0.736 franc, its lowest since 2011, before paring
losses. It was last trading at 0.8682 franc, down 15 percent.
Still, some dodged the bullet.
London-based money manager Insight Pareto, with assets under
management of about $475 billion, closed its short position
against the franc late last year.
"We didn't like how the Swiss franc behaved when the SNB
moved to negative rates ... the franc was not able to sustain
any kind of sell-off in the market," said Paul Lambert,
Insight's head of foreign exchange.
Insight converted its short Swiss franc trade into cash.
Similarly, a forex options trader at a large brokerage who
trades on the CME floor in Chicago said his firm stopped trading
options in the Swiss franc a few weeks ago because overall
volumes were increasing, leading the firm to think something was
imminent. CME volume in Swiss franc futures in December was 1.15
million contracts, up 38 percent from November and 64 percent
greater than December 2013.
'EVERYONE WAS STUNNED'
One of the winners was Sunny Dhonsi, a former JP Morgan
trader who left last year to set up Govardhan, primarily an
opportunistic equity hedge fund. He had bought puts on the euro
against the Swiss franc with a 1.20 strike price.
These puts, a bet on the euro falling against the franc,
were cheap because of how aggressively the Swiss had defended
their currency. He said with the European Central Bank poised to
boost its own monetary policy, the SNB was looking at having to
purchase even more euros in order to defend the franc.
"We didn't put on the trade thinking they would lift the cap
so soon, just that the options were too cheap and totally
mispriced," he said.
However, other computer-driven funds that base their models
on historic volatility may have been exposed because the cap has
dampened volatility in the franc for the last few years.
Commodity trading advisors returned nearly 10 percent last
year, according to data from industry tracker Eurekahedge,
nearly three times the average gains in global macro hedge
"CTAs will win from today's move, global macro may lose and
that will be a repeat of the developments that we have had in
recent quarters," said Philippe Ferreira, head of research at
Lyxor Asset Management.
Kevin Hoffmeister, a broker for RCO Financial who mainly
deals in currency markets, said he was shocked when he strode
onto the trading floor in Chicago. Because the news came out
during London trading hours, the "initial shock and awe was
over," but he still said "everybody was stunned."
Hoffmeister was unsure whether the SNB will take more
"No one thought they would do this," he said of scrapping
the cap. "Will they telegraph it any better next time? Maybe. It
caught a lot of people off guard."
(Reporting by Nishant Kumar in London and Gertrude
Chavez-Dreyfuss in New York; Additional reporting by Tom
Polansek in Chicago and Alasdair Pal in London; Editing by David
Gaffen and James Dalgleish)