‘Macro’ Traders Ride Yen’s Volatility

| March 18, 2011 | 0 Comments


As financial markets struggle to digest the catastrophic effects of Japan’s earthquake, growing violence in the Middle East and resulting jolts to global economies, traders like John Brynjolfsson and Samer Nsouli are engaged in a furious fight to try to stay ahead of events.

Wednesday afternoon, Mr. Brynjolfsson was in the lobby of a Denver office building, waiting to meet a potential investor for his hedge fund, Armored Wolf LLC. Rather than review notes for the meeting, however, Mr. Brynjolfsson couldn’t take his eyes off a television screen flashing market prices.

Soon he was calling contacts at Wall Street banks, searching for information about what he describes as “a freefall panic” in currency markets that sent the yen soaring to its highest level in years, and the dollar tumbling, all between 5:10pm to 5:20 Eastern time on Wednesday.

Mr. Brynjolfsson dialed his trader, Tim Alford, who was back in the office in Aliso Viejo, California. Their $500 million fund already was short the yen, costing it money. Now Mr. Brynjolfsson wanted to add more bearish positions.

“It’s not worth it,” Mr. Alford told his boss, urging caution.

Around the same time, Mr. Nsouli was at his trading desk in New York, watching the historic plunge of the dollar against the yen.

“I can’t believe this,” Mr. Nsouli said to a colleague in the office of his $80 million hedge fund, Lyford Group International Ltd. Rather than make a currency move, Mr. Nsouli quickly sold U.S. stocks, expecting the dollar’s drop to weigh on shares. In a matter of minutes he would learn if he was right.

Mr. Brynjolfsson and Mr. Nsouli are called “macro” traders because they bet on global macroeconomic events. Unlike most mutual funds and other vehicles, these investors can trade stocks, bonds, currencies and commodities around the globe, a freedom that helps explain why they’ve seen a rush of money from investors, as global political and economic events have more impact on markets than ever before.

But with the freedom comes added pressure. Mr. Brynjolfsson and Mr. Nsouli hold hundreds of millions of dollars of positions in global markets, forcing them to react instantaneously to different events around the globe.

A coordinated intervention in the world’s currency markets as the G-7, in a very rare move, agrees to a concerted effort to drive down the yen. WSJ’s Jake Lee and Hong Kong Bureau Chief Peter Stein discuss.

One example is oil. The nuclear accident in Japan suggested to some traders that the prices of oil, natural gas and coal would rise, as Japan and other nations move away from nuclear power, putting new pressure on already stretched energy markets. Some investors have bid up these investments. Other traders countered that the falloff in demand in Japan is quite small, or that the events there would cause a slowdown in overall economic activity, something that should hurt oil prices.

“A nuclear leak can cause oil to rally or sell off, usually in the same time,” said Mr. Brynjolfsson, citing moves in Thursday’s oil market. “And instead of typical 25-cent or 50-cent moves it’s $1 or $3.”

As they desperately search for an edge, the investors are turning to new sources of information. Mr. Nsouli, a native of Lebanon, has begun to rely on Al Jazeera’s coverage of the events. And he’s using insights from emails sent by his cousin, who lives in Bahrain, about the violent protests in that country.

One email yesterday afternoon read: “hey buddy. situation has gone from bad to worse, and in the past 48hrs it has really spiraled out of control.”

Mr. Brynjolfsson has taken to peppering questions at his 84-old father, Ari, who spent 40 years as a nuclear scientist, asking about the potential impact of Japan’s nuclear crisis.

“The amount of confusion is extreme,” Mr. Brynjolfsson says.

Mr. Brynjolfsson and Mr. Alford spent much of Wednesday debating what to do. Early in the day, while he was on the way to his meeting, Mr. Brynjolfsson listened as a European energy minister called the situation in Japan a disaster. Global stocks soon tumbled.

Seconds later, Mr. Brynjolfsson shot off an email to his portfolio manager: “Fade the rantings of the EU commissioner,” using trading lingo for ignoring the minister’s sentiments.”In five hours we’ll find out he has no information beyond last night’s Rachel Maddow show.” Don’t shift the firm’s positions, he told Mr. Alford. “The guy didn’t know what he was talking about,” Mr. Brynjolfsson explains.

He had been consulting with nuclear and medical experts, asking about the impact escaping radiation could have on citizens of the country and what could be done to help them prevent injury. He also consulted his father, who wasn’t panicked.

“We’re overdoing it,” Mr. Brynjolfsson concluded to a colleague, saying his fund should consider buying uranium. Mr. Brynjolfsson also was tempted to buy Japanese shares. But he worried that even if he didn’t think the nuclear threat was great, others might.

“If 90% of experts say don’t buy Toyota it doesn’t matter if they never find radiation on car seats,” he says.

As the yen soared late in the day, Mr. Brynjolfsson became more convinced he had to act. He long argued that Japan’s heavy debt, slow economic growth and demographic challenges eventually will cripple the nation’s currency and Japanese government debt. The Bank of Japan will be even more likely to spend money and reduce the value of its currency to help the country rebound from the recent disaster, Mr. Brynjolfsson argued.

Mr. Alford, his trader, was less convinced. He was on the phone with traders in Wellington, New Zealand, trying to figure out why the yen was plunging, concluded that it likely was because it came at a time of little trading in currency markets.

“Someone could be messing around” with the market, he said. He argued that the market was in such turmoil it would be hard to short yen at the prices quoted at that moment.

Mr. Alford also told Mr. Brynjolfsson that even if he was right in the long run, other traders could be piling into the yen, some of them scrambling to exit bearish positions on the currency, making a short bet on the yen a likely losing proposition, at least in the near term.

Shorting Japanese government debt “is where hedge fund managers go to lose money,” Mr. Alford says, citing years of losses by those making this trade.

“I’m tempted.” Mr. Brynjolfsson says. “But Tim’s trying to protect me.”

He stepped up a recent effort to slice the firm’s positions in almost every market, from stocks to emerging market debt, preparing for even bumpier times for the market. But because he clung to his relatively upbeat outlook for the Japanese crisis, Mr. Brynjolfsson warned his team to exit bearish positions before bullish ones.

Mr. Brynjolfsson flew back to California on Wednesday night, arriving at his fund’s office before 6 a.m. He and his team continued to trim the firm’s positions, while holding onto some bullish bets. That helped yesterday, as stock markets rallied. Trying to relax from the action, Mr. Brynjolfsson walked to a Zen garden in his office complex, sitting by a koi pond, waiting to hear if the Denver investors would become a new client.

Back in New York, Mr. Nsouli also was startled by the huge move in the yen late on Wednesday. Instead of trading that currency, he decided to add short positions on the Standard & Poor’s 500. Within minutes of the yen move, he had sold $45 million of futures contracts on the S&P 500. Just a half an hour later, the position had gained 1%, and Mr. Nsouli quickly sold it, pocketing a quick $450,000.

By Thursday, his focus was again focused on the Middle East, an area he thinks will have even more impact on global markets in the weeks ahead.

“The most underestimated and overlooked issue is what’s happening today in Bahrain,” he said yesterday afternoon. Mr. Nsouli argues that there’s a 20% chance that Iran enters the situation, something that could bring the U.S. into military conflict with the nation.

Such a scenario would send oil prices surging, he says. So Mr. Nsouli has been buying up oil contracts, using any dip as a reason to buy more. That move paid off Thursday, as crude prices soared 3.5%.

Write to Gregory Zuckerman at gregory.zuckerman@wsj.com

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