The strong third quarter for macro hedge funds due to dollar strength

The current trading strategy of macro hedge funds: whereas most investors lost money in the third quarter due to the decline in equities, bonds, and commodities, macro funds made a killing because of the strengthening dollar.

Speculators are benefiting from the strongest bullish wave for the dollar in more than 50 years. There are few signs that the wave is likely to crash any time soon, and despite the fact that hedge funds have recently cut down on their position, they are still comfortably long.

According to data from HFR, a source of information to the hedge fund industry, its Currency Index increased by 6.09% between July and September, marking the largest quarterly increase since the index's 2008 debut.

The index has increased 12.83% so far this year and is an important part of the larger Macro Index, which is also booming. It is on track to post its largest yearly increase, surpassing the previous high of 6.3% from 2010.

This year, the dollar has been steadily rising. Numerous currencies have fallen to record lows or to historic lows, and a sizable and expanding number of central banks have intervened to stop the meltdowns from going worse.

The earthquakes have not only affected less liquid currencies from emerging markets. To stop the franc's rise, the Swiss National Bank stopped buying foreign exchange for seven years. In late September, sterling fell 10% in a matter of days to a record low below $1.04. The Bank of Japan sold dollars for the first time since 1998.

This would typically indicate an increasing likelihood of a significant downturn. The demand for dollars is still strong because the Fed appears set to keep rising rates rapidly, a conviction shared by few, if any, other central banks.

For some time to come, the Fed's hawkish approach will boost the dollar, according to Capital Economics' Jonathan Peterson.

In the third quarter, the dollar index, which gauges the value of the dollar against a basket of six major currencies, increased 7.1%, marking its highest performance since early 2015. It was the longest upswing since 1997–1998 and the fifth consecutive quarterly increase.

This year, the index is up 17.5%. If the market closes on December 31 at this level, it will have had its largest annual gain since the start of the free-floating exchange rate era more than 50 years ago.

According to the most recent data from the Commodity Futures Trading Commission, traders reduced their net long dollar position to its lowest level since March for the week ended October 4.

However, since August of last year, CFTC hedge funds have held a net long dollar position each week. A $10 billion wager is still a rather overwhelming endorsement of the dollar over its main competitors.

The performance of the HFR Currency and Macro Indexes, which are both at record highs and have increased 12.83% and 10.91% this year, respectively, is comparable to that of the major stock and bond markets and even the entire hedge fund industry.

The benchmark S&P 500 index has been down by 23.6% this year, while the MSCI World Equity Index has decreased by 25.5%, and the benchmark U.S. Treasury index of Bank of America has decreased by 13.8%. The weighted Composite Hedge Fund Index of HFR is down 6.18%.

With figures like these, it appears that money will likely continue to buy money and wear diamonds for some time to come.