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Hedge Fund All Over 400-Year-Old Currency Theory

Renaissance-era economics are so hot right now.
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Knew what they were talking about.

First Quadrant’s Absolute Return Currency Fund is up 9.6% this year. And while it’s got all of the high-powered computing you’d expect from a 21st-century forex fund, all credit goes to some holy folks at la Escuela de Salamanca some years back.

The strategy is based on the theory of purchasing-power parity, an achievement of theologians at the School of Salamanca, where it was developed based on silver and gold trading between Spain and its colonies in the Americas during the 16th century.

Of course, you only need to look to last year when First Quadrant’s adherence to Renaissance-era economics didn’t exactly pay off. And skeptics have a few doubts about the strategy’s longer-term viability.

The success marks a turnaround from 13 months ago, when the fund logged its steepest daily drop on record after the Swiss National Bank’s shock decision to abandon the franc’s cap against the euro….

“All the funds that are hot right now are having unusually good streaks because of what’s going on in the world right now, which is a risk-off environment,” said John Dean, managing director of London-based Absolute Return Strategies Ltd., which selects hedge-fund strategies for its investible indexes. “But foreign exchange changes its characteristics really quite rapidly. Risk-off is a one-in-five-year phenomenon.”

This Hedge Fund Topped Rivals With Mix of Algorithms and 16th-Century Theory [Bloomberg]


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