Adrian Lee, President of Dublin-based Lee Overlay Partners, has been selling Asian currencies and buying those from eastern Europe, giving his wealthy clients better returns than they were promised.
Lee runs a currency overlay management company, which takes speculative positions in currencies on behalf of big investors and pension funds, using their assets placed with other fund managers as collateral.
Trading in and out of various currencies, he tries to reduce the risk or supplement the return of these investors. "We are doing an overlay on assets which are managed by another person," Lee told Reuters in a telephone interview.
Lee Overlay Partners manages about $5.5 billion in currency exposures globally on behalf of about 13 institutional clients, but it does not get its hands on the money. It merely buys and sells futures, options and forward contracts in various currencies, based on the risk appetite of the investor.
Before founding his company in 1999, Lee worked in J.P. Morgan's currency overlay department in London.
This year, for the first time, the firm ventured into the emerging market arena, deploying strategies honed during Lee's 18 years of trading developed market currencies. That has paid off.
Clients, who had braced for a 3 percent volatility on their returns, received 5 percent as a result of the firm's dabbling in emerging market currencies so far this year.
Some of his best bets this year were on the Brazilian real and Turkish lira.
"Our positions are largely driven by real interest rate differences, so the countries that have higher real interest rates without big trade deficits would be more favoured," he said, speaking of his fundamental strategy.
Less than a billion dollars of the notional funds managed by the firm are in emerging markets.
"We would be less long on the Asian currencies than some of the east European. And South American currencies would be some short, some long," Lee said. Being short Asian currencies made sense, because real interest rates were low or even negative, and they were not appreciating fast enough, he said.
"The common sense view is that there should be an Asian revaluation at the end of the year but that's changing very quickly too. That view has been pushed out quite far with Snow's recent comments," Lee said.
He was referring to last week's meeting of policy-makers from the Group of 20 nations in Beijing, where, contrary to market expectations, there was not much pressure on China to let the yuan rise faster. US Treasury Secretary John Snow said he was convinced China would make the yuan more flexible over time.
Lee feels it still makes sense for investors to trade the much larger and diverse pool of emerging market currencies.
"There are 22 currencies in the emerging market universe whereas there are only 6 currencies in the developed market universe, so it is almost a safer strategy."
"The risks are that emerging market currencies tend to be more global than local macro, and the contagion effect or some effect hitting all markets simultaneously is a more significant risk than that of one currency devaluing quickly or realigning quickly," Lee said.
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