The Forex Paradox – Is Forex a net loser?

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The Forex market is the largest in the world and the least understood.  Since the late 90's, traders and asset managers have flocked to it as an alternative to trade, compared to other common markets (Stocks, Bonds, Futures).

But due to the fact that the market is decentralized, and unregulated, it also attracted a large amount of fraud, on many levels.  First, there was outright theft by groups such as the one led by Trevor Cook ($190 Million Ponzi scheme).  Then there were sham brokers, in the most extreme case, like One World Forex, that simply didn't bother clearing client orders and used client funds to finance lavish lifestyles and a movie that was never released featuring Busta Rhymes.  Those in the new growing retail market on both sides of the dealing desk developed a special bond going through a unique experience that just wasn't possible in other markets.

It was said that this was a retail problem, that serious institutional Forex was not aparty to such nonsense.  But now the world's largest investment banks are under investigation by the Department of Justice for Forex market rigging.  This includes names such as Goldman Sachs, Lloyds of London, JP Morgan Chase, Barclays, Citigroup, just to name a few (the full list of names has not been released).

It was always a question that Forex outsiders would ask, why the big banks didn't get into retail Forex trading.  Now we know that not only were some banks charging 7% (700 pip) spread on deliverable transactions, they were 'banging the close' and had basically a near complete control over the price.  So why would they take any risk?

But one of the most overlooked news stories is that of FX Concepts, known as the Rolls Royce of Forex funds, being the first in the business and eventually the largest FX hedge fund.

From Hedge Fund Alert:

Less than a year before his currency-trading shop filed for bankruptcy, FX Concepts founder John Taylor personally guaranteed a chunk of the debt his firm owes to its largest creditor.

Asset Management Finance, a Credit Suisse unit that has invested in a number of prominent hedge fund-management firms in the past decade, provided $40 million of debt financing to FX Concepts via two revenue-sharing agreements in 2006 and 2010. But in December 2012, as opportunities in the currency market continued to fade and redemptions mounted, Taylor was forced to renegotiate the financing package. The Credit Suisse unit agreed to defer eight quarterly revenue-sharing payments in exchange for Taylor’s personal guarantee for those obligations. As of Oct. 17, when the firm filed for Chapter 11, FX Concepts owed Asset Management Finance $34.4 million, with Taylor on the hook for $5 million of the total. “AMF is going to clearly try to get money out of John,” a source said. “By any stretch of the imagination, it’s not there.”

The terms of the refinancing deal with Asset Management Finance, spelled out in recent court documents, suggest FX Concepts was in even
worse shape than previously understood. The fact that Taylor had to personally guarantee his firm’s obligations underscores a dramatic decline for a business that for years was the world’s largest
currency-fund operator, with more than $12 billion of assets. As recently as the first quarter, FX Concepts had $1 billion under management. 

When traders would debate "is anyone making money in FX" - proponents of Forex investing and trading would point to FX Concepts as an example as a group that was continually successful.  For years they had multiple products that continued to acheive above average returns in the mysterious FX market.  Until now.  Not only is FX Concepts shutting down, creditors are going after the founder who pledged personal guarantees on capital when performance started struggling.

Certainly not every Forex trader or strategy loses, but with the losses incurred by FX Concepts, we should rethink our approach to trading Forex.

Originally posted on Zero Hedge

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