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In March, as his country teetered on the brink of insolvency, Greek Prime Minister George Papandreou blamed "unprincipled speculators" for exacerbating the crisis. Currency traders around the world were roiling markets, he said, and threatened to trigger a new global financial meltdown. He was talking about people like Andrew Law, chief investment officer of the $9 billion Caxton Associates, one of the best-performing hedge fund firms in the world.
What Papandreou saw as opportunistic speculation was all in a day's work for Law, 44. At the beginning of 2010, Law had a simple goal: to make money betting on global economic growth by shorting the euro and going long the rest of the world. He thought the Continent had problems that predated any impact he and his colleagues might have had. Currency traders make money betting on the movements of one currency against another. While other investors look at book value and price-to-earnings ratios, currency traders must stay abreast of political developments in every corner of the globe, translating tiny policy shifts or growth projections into profitable trading opportunities. At a time when many nations are in the midst of economic crises and concerns about sovereign debt are widespread, Law and other currency speculators can affect capital flows in and out of a country, driving up import prices and inflation, pushing stock and bond prices down, and causing a government's cost of borrowing to increase. The question is whether traders who bet on currencies are obstacles to a global economic recovery, as Papandreou suggests, or simply another set of actors making money—and making the market more efficient while they're at it.
Law believes that currency traders help resolve imbalances in the market. He simply wants to profit from his trades. "The driver of foreign exchange is having divergent outlooks for different countries," says Law, "and the fundamentals are pretty diverse at the moment."
Just as he was buying Canadian, Australian, and Asian currencies and pairing them against short positions in the euro, other traders were pairing those long investments with short bets against the U.S. dollar, which had weakened against the euro for much of the previous year. Law, however, was more concerned about Europe, after news that Greece's deficit was wider than previously reported. He wasn't sure how much higher the euro could go—it was then worth around $1.50, after climbing as much as 21 percent against the U.S. dollar in 2009. He saw the euro as the weakest link in the global currency market.
The 16 European Union countries that use the common currency had amassed too much debt. If investors began to view any of them as a default risk, the traders would start selling their bonds, stocks, and other assets, driving the currency lower. For the first five months of the year, foreign exchange trades were the largest bet in Caxton's main macro fund, and those trades were making the fund the most money. About half of Caxton's risk was from trading currencies, a higher-than-normal level for the firm that Bruce Kovner, who boasts one of the best track records in the hedge fund industry, formed 27 years ago. Law, who grew up in Cheshire, England, and is based in London, has been with Caxton for seven years. He was named Kovner's heir apparent in 2008.
Rarely have global economic conditions been so ripe for betting on currency fluctuations. Most traders agree they haven't seen such a difference between outlooks for different countries in at least a decade, and exploiting that gap is how currency speculators make money. Recovery prospects for the U.S. seem to be fading as employment fails to pick up, and Greece, Spain, and other European nations face massive deficits. At the same time growth prospects in Taiwan, Brazil, Malaysia, India, and Australia are so strong that policymakers have been raising interest rates to curb inflation. China has taken steps to deflate its real estate bubble and has let its currency drift higher for the first time in two years.
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