Shoulda bet on OJ

Global economic growth has fueled accelerated demand for raw materials, sending crude oil up 36 percent since the start of 2005. Corn jumped 74 percent over the same period, and copper doubled. Orange juice soared 132 percent.

Currency Bets Punish Commodity Traders, Henry in 2006 (Update1)By Mark Tannenbaum and Michael McDonald

Henry runs a group of commodity trading advisers, a type of fund manager that buys and sells currency, bond or commodity futures on the Chicago Board of Trade and other exchanges. His John W. Henry & Co. $1.25 billion Strategic Allocation Program lost 12.5 percent this year and plunged 19.2 percent in 2005.

The $70 billion managed by so-called CTAs returned 1.4 percent on average this year because of the steepest currency losses since 1994, said San Diego researcher Daniel B. Stark & Co. The funds, which use computer-driven trading to profit from changes in exchange rates, tumbled as the euro stayed within its narrowest range since the currency was created in 1999.

"It's been brutal," said Jeremy O'Friel, principal at Appleton Capital Management in New York, whose $150 million currency fund is down 11.7 percent this year. "In the absence of volatility, it's very difficult to make money."

Commodity trading advisers, whose investments returned just 0.5 percent in 2005 after they increased their bets on currencies, would have done better buying corn or orange juice.

Even the benchmark U.S. 10-year Treasury note outperformed commodity trading advisers, returning 3.7 percent since the start of last year on buying by foreign central banks, according to data compiled by Merrill Lynch & Co. The Standard & Poor's 500 Index of stocks has gained 15 percent.

John W. Henry's Strategic Allocation Program made its biggest bets during the past three years on currencies, which accounted for 37 percent of assets. It had 24 percent in interest rates, 14 percent in energy, 13 percent in global stock indices, 7 percent in metals and 5 percent in agricultural commodities. The Boca Raton, Florida-based company manages $1.9 billion and has eight other funds.

Henry isn't the only sophisticated investor losing on foreign exchange. Omaha, Nebraska-based Berkshire Hathaway Inc., whose chairman is Warren Buffett, lost $955 million last year in a wager against the dollar. Berkshire made $2.96 billion between 2002 and 2004 by betting on a dollar drop.

A Deutsche Bank AG index that tracks CTAs, hedge funds and mutual funds that invest in currencies has dropped 2.8 percent this year.

"We're suffering like everyone else in the currency sector because there's no volatility," Mario John Kelly, co-founder of London-based Wallwood Consultants Ltd., said in an interview from his office in Seville, Spain. Kelly said he may look more at equities after the $13 million fund fell 6.2 percent this year, compared with a 24 percent gain in 2005.

This year, currency funds have lost 4.9 percent, the most in 12 years and the worst performers in the CTA universe, according to Stark. The strongest area for CTAs is stock futures, which have produced a 9.6 percent return for the funds this year, Stark data show.

John W. Henry's $195 million Dollar Program, his biggest dedicated to currencies, has fallen 34 percent this year, the most among currency CTAs in the Stark index. The fund on average has allocated 36 percent of its assets to trades involving Asian currencies and 64 percent to European currencies the past three years, according to the company's Web site.

Fluctuations in financial markets have lessened, eroding the profit potential for commodity trading advisers, partly because of greater predictability in economic growth and inflation, John W. Henry Co. President Mark Rzepczynski wrote in the company's October market commentary. Price swings also have been curbed by more transparent and gradual moves by central banks, he said.

"We need market prices to move in a specific direction to find and exploit trends," Rzepczynski wrote. "In the long run, this is manifested through volatility."

Volatility in the euro, a measure of the currency's price fluctuation, fell this month to the lowest since the euro's January 1999 debut, according to data compiled by Bloomberg. The euro-dollar rate accounts for 28 percent of the $1.9 trillion in daily currency trading, the biggest portion, according to the Bank for International Settlements in Basel, Switzerland.

Three-month implied volatility on the rate, reflecting traders' expectations for future swings, dropped to 5.975 percent on Nov. 6, from 10.5 percent at the start of 2005. It approached 16 percent in October 2000, when the euro set a record low.

"If you're a momentum-focused, trend investor, you will not do well in this market," said Michael Huttman, who helps manage about $10.5 billion as chief investment officer at Millennium Global Investments Ltd. in London.

Many commodity trading advisers are suffering from a focus on returns linked to the dollar, Huttman said.

Even after their poor showing the past two years, futures traders are attracting new money as investors seek to diversify away from stocks and bonds, said Emanuel Balarie, a senior market strategist in Newport Beach, California, at Wisdom Financial Inc., which helps investors select CTAs.

O'Friel at Appleton said he expects business to improve next year because the Federal Reserve will start cutting interest rates to revive economic growth, boosting the volatility in currency markets.