| Customers line up to exchange currency after Switzerland’s surprise move last Friday (Bloomberg) |
Robert Citrone’s Discovery Capital Management is the latest hedge fund firm to disclose a loss on a big negative bet on the Swiss franc.
However, Citrone was able to mitigate the decline — unlike Marko Dimitrijevic’s Everest Capital, which closed its $830 million Everest Capital Global fund after it suffered huge losses when the Swiss National Bank decided to let the franc float freely in the currency market after three years of carefully capping its trading range.
In his latest weekly e-mail missive, dated January 16, Citrone told clients that his Discovery macro funds have been short the Swiss franc for the past three years. When the Swiss central bank made its surprising announcement on January 15, the surge in the franc’s price and the fall in the euro’s price “erased a big chunk of the gains” Discovery enjoyed from that trade during that three-year period, Citrone told clients in the e-mail.
As a result, for the month to date, the South Norwalk, Connecticut–based firm’s funds were down roughly 200 to 250 basis points, or 2 to 2.5 percentage points, on a gross basis, according to the hedge fund manager’s communication.
“Despite our loss on the Swiss franc, I am very pleased with how we handled the situation,” Citrone told his clients. “The European desk called me immediately at 4:21 a.m. From my home office, I worked with my currency analyst and trading team to develop a strategy for the portfolios.”
Citrone assured investors that he and his team “were decisive and patient,” and they did not sell at the lows.“We were able to liquidate a vast majority of the portfolio before New York came in, as we thought euroswiss would ultimately trade much lower,” he adds. As a result, Discovery was able to unload its entire holdings in the Euro–Swiss franc at an average exchange rate of roughly 1.035, Citrone told clients.
On Tuesday the exchange rate fell to 1.016. Meanwhile, Citrone said Discovery has taken additional actions based on the change in Swiss policy, which he said “so far, have been profitable.”
Elsewhere in his portfolio, Citrone told clients that Discovery has been “positive on a meaningful European QE [quantitative easing] announcement in January for some time,” stressing that the firm is well positioned for such a move. It also remains “quite constructive” on India.
As we previously reported, in early January, Citrone said in his weekly e-mail that “the risk/reward for higher equity markets in the first two months of the year is quite positive.”
“With global yields at or near record lows for most countries, and oil prices down over 40 percent, global growth is likely to accelerate from 2014 levels,” he added. “This acceleration will be modest, but will drive earnings and risk premiums while inflation should remain low.”
Citrone said at the time that he was looking for another low double-digit gain for the S&P 500 stock index this year, a stronger U.S. economy “and modestly higher interest rates” in the U.S. and a few emerging-markets countries.
Last year, Citrone’s two macro funds lost money. The Discovery Global Opportunity Fund finished down 3.21 percent for the year, despite rising 2.28 percent in December.
The Discovery Global Macro Fund was down 8.54 percent for the year, through December 26, according to a document from investment bank HSBC that tracks hedge fund performance.
