CHF Trade Wipes Out A $830 Million Hedge Fund Last Week

Swiss National Bank sudden decision to freely float CHF against the EURO made many causalities last week that includes a number of big global forex brokers. It is now being reported that a big hedge fund has also been wiped out by the events that took place last week. Marko Dimitrijevic, the hedge fund manager who survived at least five emerging market debt crises, is closing his largest hedge fund after losing virtually all its money this week when the Swiss National Bank unexpectedly let the franc trade freely against the euro, according to a person familiar with the firm.

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CHF appreciated an unprecedented 41% in one day last week when the Swiss National Bank made a sudden decision to unpegg CHF from EURO. Three years back, Swiss National Bank had pegged 1.20 Swiss franc to 1 euro. The SNB’s decision to remove the three-year-old peg, a legacy of Europe’s debt crisis, left a number of financial firms reeling. One of the worst hit was retail currency trading firm FXCM was forced to take a $300 million lifeline from Leucadia National. Major Wall Street banks like Citigroup, Deutsche Bank and Barclays also took a hit.

Important question how did it happen? Why these firms took such a big hit? The answer is simple. These firms had been following a poor risk management regimen that had been working till now. But when happened last week was unprecedented, EURCHF fell 2,296 pips in just a few seconds. This sudden downward spike did the worst damage that these firms suffered in their whole existence. We can assume the hedge fund was also overleveraged with EURCHF trade and was not using solid risk management controls on what it was doing.

In future it is expected that forex brokers and hedge funds will be using strong risk management rules so as to avoid going bankrupt in just a few seconds. Now many analysts are calling Swiss National Bank decision to be amateurish. Switzerland is also going to feel the pain of this decision. The higher franc makes Swiss products, like chocolate, pharmaceuticals, and watches more expensive in the international marketplace. According to Morgan Stanley, 85 percent of Swiss company sales come from outside Switzerland. Corporate giants like food maker Nestle and drug maker Novartis make almost all their money in foreign markets. A strong CHF is also going to hurt the Swiss tourist industry which depends heavily on the foreign visitors. With the peg removed, investors are dumping EURO which will slide down more and will most probably end up below the 1.00000 level.