Upholding specialised strategies in forex fund management amid economic crisis

Introduction

The economy is very unpredictable; it’s a state that is constantly in motion; it fluctuates, it stabilises. However, when it gets stable, there’s cases of growth and improved dimensions of things, but when it experiences downtime, it exposes the general market to harsh realities, and Forex trading isn’t left behind. Here, the market is prone to suffer from unstable market trends that often lead to undesirable losses from the end of traders. This period is very upsetting, mostly for Forex fund managers, as the task of guiding and protecting traders’ investments while at the same time trying to see massive returns becomes increasingly frustrating. Economic downturns are usually greeted with tough fists of financial instability, market volatility, and misappropriation of funds, which grows as a challenge for the fund managers while trying to prove expertise. This drags us to the central objective of this article: to address economically ill scenarios with durable strategies needed to manage the risks involved. It would explore the intricacies of fund management and offer dynamic details of relevant case studies, providing pragmatic insights and actionable decisions.

“These instances show the grave impact economic dwindle has on the Forex market, pointing to the need for Forex managers to prove their mettle by adopting strategies peculiar to situations to keep staying afloat regardless of the economic slide.”

When the economy is strained, usually what follows is a drastic decline in GDP, a decline in consumerism, and increased rates of unemployment, all contributing to the gap it creates in the Forex market. As a result of economic downtimes, currency values in the Forex market decrease, dovetailing into an exhibition of high volatility rates. This gives reasons for investors to respond with lowered investment rates. This is also due to harsh central bank policies and geopolitical friction.

A typical example of this goes far back in 2008, when a global financial crisis enveloped the world, with the USD currency experiencing a disturbing surge of over 15 percent in 6 months, opening for a rush towards safe-haven assets. In the same vein, during the COVID-19 pandemic in 2020, because of the situation of things globally, some market currencies declined with an average rate of 5.3 percent against the USD, including South Africa’s Rand, dropping as much as 30 percent from its historical rate. These instances show the grave impact economic dwindle has on the Forex market, pointing to the need for Forex managers to prove their mettle by adopting strategies peculiar to situations to keep staying afloat regardless of the economic slide.

Strategies for Market Stability During Economic Declination

When the economy affects the Forex market, there’s no doubt that trading becomes prone to losses. However, the following strategies could be employed to minimise the risk of losses:

Diversification

Diversification in Forex is the act of spreading investment across different assets. This literally fits the idiom of “not putting all the eggs in one basket.” This strategy is profound and can be effective during economic storms. When there’s a spread of investment in different currency pairs, it reduces the exposure of a single market’s downturn, and even if a currency goes flat, the other currency rates would suffice.

In 2008, during the global financial crisis era, the diversification strategy was utilised by a renowned Forex fund with over $500 million in assets under management, but facing the brunt of the crisis didn’t lead to incurred losses as it emerged with a 7 percent return, which is 10 percent higher than the market’s average at the time. From the diversification strategy, the fund management was successful because of the strategic allocation of safe-haven currencies like the Swiss Franc (CHF) and Japanese Yen (JPY) with high potential of appreciation because investors were surely going to turn to mid-currencies in order to survive the financial drain. From this instance, it’s clear that diversification across currency pairs is useful and can protect investments during market volatility sprees, ensuring that while you suffer loss, there are gains from other assets to cover up.

Read also: Diversifying forex portfolios: A strategic guide for forex fund managers and traders

Fund managers should therefore know that the diversification of portfolios on several currencies assures the protection and stability of funds during economic downtimes.

Hedging

Hedging in Forex simply means protection. This strategy follows the act of fund managers using financial tools such as options and futures to secure investments during erratic currency movements. During the COVID-19 pandemic, there was a witnessed economic downturn, and at this time, ABC Fund utilised the hedging strategy to their advantage. Amidst the market fluctuations, ABC opted for forward contracts and options, which helped them to protect their investments, especially since there was a 10 percent radical swing of the EUR/USD pair.

This approach is proactive, and it helps to reduce losses, allowing fund managers to achieve returns, and in the case of ABC, they achieved a 5 percent return at the end of 2020 despite the economic downtime and unpredictability. ABC’s results proved the efficacy of this strategy and position it as a necessary risk management tool that fund managers should consider to stabilise returns and ensure fund security during market fluctuations.

Liquidity Management

Liquidity is the conversion of assets to cash, crucial in Forex during economic hardships. It allows fund managers to respond swiftly to market opportunities without making rash decisions. Assets with higher liquidity levels perform better during economic downtime. During the 2008 global financial crisis, a Forex fund company maintained a high liquidity ratio, avoiding forceful sales for sustenance and focusing on durable assets. Liquidity prevents unnecessary losses and positions fund managers for market recovery.

These strategies are crucial for Forex risk management and are important because of a litany of reasons:

To preserve the capital of investors. When fund managers appropriately utilise these strategies, losses will be minimised, hence capital preservation.

It leads to a reduction in emotional stress and better decision-making. When risk management strategies are applied in economic downtimes, there’s less need for panic and anxiety. It rather gives headway for taking measures that lead to identifying risks upfront and deciding on possible tactics to stay ahead of the market.

When fund managers uphold these strategies, consistency in returns is ensured. Investments would continually breed returns because of the effectiveness of the strategies, and this often leads to long-term sustenance in the market.

Statistically, market currencies are often weak during tough economic times, having capital loss and asset depreciation. This is backed by the 2021 World Bank report that noted a currency decline in capital outflow resorting to $83 billion during the COVID-19 pandemic. This, however, is in contrast to the appreciation of value for CHF and JPY currencies due to their mid-stance of prices amid economic shock. This led to an increase in investments and an appreciation of long-term value, further reinforcing the importance of diversification, hedging, and liquidity management as Forex’ fund management top strategies during economic downturns.

Conclusion

Forex fund managers needless to worry during economic downturns when there’s the availability of a comprehensive approach including diversification, hedging, and liquidity management. The case studies of ABC and co demonstrate the effectiveness of these strategies; hence, they are advised to be implemented during times of economic instability to stay afloat in the market.

The application of these strategies helps to manage risks, safeguard portfolios, ensure long-term profit, and enable forex traders or companies to shine their resilience during disturbing economic periods.

Temitope George Ijibadejo, is an award-winning Forex fund manager with over 15 years of experience as a Forex fund manager, and business developer consultant and trainer in Forex trading