Hedge Fund as a Speculator in the Forex Market
Hedge Funds, often considered as speculators in the forex market. This means that they are speculators who play funds from their clients. Hedge funds are like a bag that can double money. The money is funds originating from rich people, pension funds, companies, allowances and others managed by fund managers. Usually, hedge funds try to manage assets by protecting an asset value from risks, such as foreign currency risk.
Basically, hedge funds play a role in protecting the value of currencies (assets) from clients. You do this by buying and selling foreign currency according to the currency they manage. But nowadays most of the hedge funds don’t do the things they should do. Most of them try to find benefits for themselves regardless of the risks that will be received by the clients’ funds.
Hedge funds usually use leverage
Hedge funds usually use large amounts of leverage when they trade on the futures market. In this case we talk about fund managers in the forex market. Usually they use client funds that have credit loans (banks or other large financial institutions), then transact on the forex market.
The system works quite well when the credit market is balanced. But when the credit market freezes and crashes instantly, this system will fail. The forex market will get turbulent, make a big swing-swing price. In 2008 economists accused irresponsible hedge funds. That is when making the USD / JPY pair move with a large swing-swing. They (hedge funds) take advantage of the turmoil that occurred in the property market crisis and speculate about the US dollar.
Back in 2008, many hedge funds opened high-leverage trading accounts, and entered as carry traders in Japan Yen. The Carry Trade trade is taking advantage of spreads and distant interest rate differences between the two countries.
Basically, you sell currencies with lower interest rates. You use funds to buy eyes with higher interest rates. In essence, Carry trade is to compare differences in interest rates between countries as the basis for transactions.
That way, when you pay the interest rate of the currency sold. You benefit from the interest rate on the currency purchased.
At first this strategy was very effective and used by hedge funds. But when the financial crisis 2008 carry trade was considered as a crime from irresponsible perpetrators. Carry trade provides a large swing and imbalance in exchange rate movements and adds ‘homework’ to the government and the central bank.