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Quant Hedge Fund Aspect Sees More FX Risk on Investor Radars

Andreea Papuc and Sybilla Gross

(Bloomberg) -- Aspect Capital Ltd., a quantitative hedge fund with about $7 billion in assets, is seeing greater demand for currency hedging products from Australian pension funds looking to boost returns.

The money management company that uses data-crunching algorithms and mathematical models to bet on market trends has received an increased number of requests for currency overlays and specifically designed mandates to handle foreign exchange risk. Part of Aspect’s business that deals with managing this type of exposure is growing globally, including in Australia, according to Anthony Todd, chief executive officer of the London-based firm.

“Investors are now paying close attention to unintended risks in their portfolios and unmanaged FX risk is one of these,” said Todd. “We have seen a long period of U.S. dollar appreciation and investors are generally nervous about what the next few months of central bank action will mean for FX markets.”

The desire to use sophisticated trading strategies to capture returns and limit risk is in part informed by the longevity of low global rates, the surge in negative-yielding debt and a broader decline in foreign-exchange volatility. To avoid becoming complacent with a shaky global growth backdrop and a lingering trade war, large pensions funds can’t afford to stand still as future return forecasts fall.

Aspect raised about A$200 million ($136 million) in 2018 from Australian superannuation funds, mainly in its trend-following strategy, according to the firm. That was even as hedge funds that use computer models to trade suffered last year amid a surge in volatility.

The Australian dollar is projected to rise to 70 U.S. cents in the second half of next year and to 74 cents in 2021, according to forecasts compiled by Bloomberg. It was trading just below 68 cents in Sydney on Friday.

This year has been slower despite a solid performance, Aspects said without providing any figures. However, it was in advanced discussions with a number of superannuation funds to add to its portfolio, according to Julian Maquieira, a senior institutional sales representative.

Aspect’s diversified program, its longest running strategy with about $3.1 billion in assets, is up about 18% this year, as it was able to capture a strong trend in fixed-income markets in particular, Todd said. That comes off the back of an almost 15% slide in 2018.

“Investors are concerned about a persistent erosion of principal in stock and bond markets,” Todd, who co-founded Aspect with Martin Lueck more than two decades ago, said. “There is an increasing concern about the global economic recovery. Investors are concerned that there’s the increasing risk that we might see a protracted draw-down.”

Aspect manages more than A$900 million in Australia. It’s had a partnership with Colonial First State targeting the retail market for almost 10 years. Todd spoke in an interview in Sydney and in emails earlier this month.

(Adds forecasts for Australian dollar in sixth paragraph.)

To contact the reporters on this story: Andreea Papuc in Sydney at apapuc1@bloomberg.net;Sybilla Gross in Sydney at sgross61@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Adam Haigh, Brett Miller

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