財經觀察 2218: Jen Exits Morgan Stanley With Dollar Smile

Jen Exits Morgan Stanley With Dollar Smile Going to BlueGold
2009-10-06 23:01:00.22 GMT

By Ye Xie and Anchalee Worrachate
    Oct. 7 (Bloomberg) -- As a currency strategist and economist at Morgan Stanley for 13 years, Stephen Jen made
market calls and forecasts. It was up to clients to decide whether to buy or sell based on his recommendations.
    Now, Jen is the one doing the buying and selling. In May, he joined London-based hedge fund firm BlueGold Capital
Management LLP to oversee a trading portfolio while serving as managing director of macroeconomics and currencies. He declined to reveal his returns so far. “I am still learning,” Jen, 43, says.
    “I have been in this industry for more than 10 years, and I hadn’t taken any meaningful risk,” says Jen, who started as a strategist at Morgan Stanley in Asia and later became head of global currency research in London. “That’s something I decided to tackle.”
    As a firm, BlueGold, which specializes in commodities and has $1.4 billion under management, gained 50 percent so far this year after fees, following returns of 209 percent in 2008, Jen said in mid-September.
    At Morgan Stanley, Jen led a research team whose market calls resulted in gains that outpaced market benchmarks in
recent years, including during the unprecedented turmoil in 2008. A model portfolio built by the firm to track the
performance of the team’s recommendations and weightings returned 27.2 percent from April 2004, when it was created, through 2008. That compares with 8.3 percent for the benchmark Barclay Currency Traders Index in the same period.

                        Krugman Student

    Jen, who studied under Nobel laureate Paul Krugman and the late economist Rudiger Dornbusch while pursuing a doctorate in economics at Massachusetts Institute of Technology, made his mark at Morgan Stanley with studies of big­picture issues ranging from global trade imbalances to the growth of sovereign wealth funds.
    Some, like the “dollar-smile” theory he developed in 2001 which predicts gains for the greenback during times when the U.S. economy is either in a deep slump or growing strongly, and underperformance for the dollar during times of moderate growth ran against the grain and only gradually gained acceptance when the market validated his views. By the time he left Morgan Stanley, Jen’s distribution list had grown to 3,000 clients and market participants.
    “He has an ability to separate trend from noise and keep a level head in a business that can cause people a lot of
distractions,” says David Gerstenhaber, founder of New York- based Argonaut Management LP, who formerly worked t investor Julian Robertson’s Tiger Management LLC in the 1990s. “He’s not stuck with traditional ­analysis, and he’s willing to come up with independent thoughts.”

                         Dollar Slump

    In July 2008, as the dollar slumped against most major currencies, Jen was among the first forecasters to correctly
predict the greenback’s turnaround, foreseeing that investors would flock to the safety of the U.S. currency amid slowing global growth and mounting financial instability.
    In September 2008, Jen told Morgan Stanley clients in a research note that Brazil’s real, trading at a near 10-year high against the dollar, was one of the most-vulnerable currencies and would be “stress-tested” on capital flight. The real
touched 2.62 on Dec. 5, a 45 percent decline from when Jen published his note.
    “My view is that when the world shifts into a crisis mode, anything is possible,” Jen says. “Whatever you think could
happen, double the magnitude.”

                       Varied Background

    Jen’s varied background in both the public and private sectors helped shape his perspective on markets and economies.
    Born in Taiwan, Jen moved to California with his mother and three siblings when he was 14 for the educational opportunities available in the U.S. His father, a former military officer, stayed behind in Taipei and supported the family.
    Jen received an undergraduate degree in engineering from the University of California, Irvine, before pursuing a doctorate in economics at MIT in Cambridge, Massachusetts, where he studied international economics under Krugman. After graduating in 1992, he landed a job at the International Monetary Fund, where he worked on frameworks for providing loan relief to indebted countries, particularly in eastern Europe.
    Jen left the IMF in late 1996 to join Morgan Stanley, which gave him the choice of covering Latin American currencies out of New York, eastern European currencies out of London or Asian currencies out of Hong Kong. Jen says he chose Asia because he thought it would be a tranquil and stable place where he could get used to his new job. “I wanted to go somewhere safe,” he says.

                       Learning Firsthand

    Instead, he learned firsthand about how markets are buffeted in crises.
    Several weeks after he arrived in Hong Kong in January 1997, he says he felt “something was not quite right,” even as economies from Thailand to South Korea experienced explosive growth. He recalled an article Krugman wrote three years earlier that attacked the “Asian economic miracle” as a myth, arguing that the economies’ reliance on foreign capital for growth wasn’t sustainable.
    By February 1997, Jen started telling clients to sell Asian currencies. Five months later, Thailand was forced to devalue the baht. The Thai currency lost more than half of its value in four months. The crisis spread to the whole region, dragging own currencies and economies from South Korea to Indonesia.

                           Wrong Call

    Jen made one of his first serious wrong calls in December 1997 when he forecast the continued collapse of Asian
currencies. Instead, the currencies bounced back as the weaker exchange rates boosted exports, which helped to foster a recovery. “I completely missed that,” he says.
    Jen learned the lesson that emerging-market currencies are highly influenced by capital flows. This often leads to sharp
sell-offs followed by rallies. During a crisis, cherry-picking good currencies won’t work, as investors liquidate everything at hand.
    “That one-year period really taught me a great deal about the market,” Jen says. “It taught me how quickly people’s
opinion changed and how powerful the capital flows may be.”
    Jen stayed in Hong Kong until 1999, when he moved to London to cover the dollar and other major currencies.
    In 2007, Jen was among the first to flag the growing importance of sovereign wealth funds as a source of global
capital and to recognize the potential implications for markets and currencies.

                       Foreign Reserves

    He estimated in a May 2007 Morgan Stanley research note that total assets controlled by the funds, which are pools of capital that Asian nations and oil-producing countries in the Middle East and Europe derived from their foreign reserves, would grow to $12 trillion by 2015, almost the size of the U.S. economy.
    “Asset allocation, pension funds, reserve policy, currency policies of Asia-all of these issues are somehow nicely and neatly tied together by this topic,” Jen says.
    He revised his growth figure to $10 trillion in October 2008 as the funds, including Temasek Holdings Pte and China Investment Corp., suffered investment losses during the financial crisis.
    Jen sees little risk of the dollar losing its status as the world’s reserve currency anytime soon. His view stems partly
from the fact that the U.S. is the biggest economy, with the deepest financial markets. It also reflects his own immigrant
experience, he says.

                        ‘No Conditions’

    “America welcomed our family with no conditions,” says Jen, who lives in the South Kensington area of London with his German wife, Manuela. Their twins -- a son and a daughter ­- turn 2 years old on Nov. 19. “I have respect for the U.S. because the system is right and it works. It’s easy and tempting to underestimate Americans, but that’s almost always a mistake.”
    In making his call on the dollar last year, Jen applied the dollar-smile theory he and his former colleague Fatih Yilmaz
developed at Morgan Stanley eight years ago in London.
    The theory, which derives its name from the shape made by the dollar’s price movement on a graph during various economic scenarios, holds that the U.S. currency rallies when the world’s largest economy is in either a deep recession or a boom. It weakens when growth is moderate, as investors shift their money into higher-yielding markets for better returns.
    The two strategists came up with the theory as they sought an answer to the question of why the dollar continued to gain in 2001 even as the U.S. slipped into recession and the Federal Reserve slashed interest rates.

                       Prevailing Wisdom

    The prevailing wisdom at the time, based on trade balances and interest-rate comparisons, suggested the opposite would happen. What the consensus views missed, Jen says, was how, during times of global uncertainty and economic contraction, investors tend to pile into the dollar as the currency of last resort.
    “If you really think about it, it’s actually quite intuitive, but you have to first accept the special status of
the dollar in the world,” he says. “You cannot treat the dollar as any other currency.”
    This year, after starting out strong against most major currencies, the dollar has weakened as more than $2 trillion of
stimulus funding by governments stabilized financial markets and set the stage for a recovery, reversing the flight to the safety of the U.S. currency.

                         Smile ‘Gutter’

    Now, Jen says, the dollar is approaching the “gutter” of the smile, and he predicts that a slow U.S. recovery will weaken the greenback further against currencies such as the Australian and New Zealand dollars, the pound and emerging-market currencies by year-end. The pound will rise as high as $1.75 by year-end from $1.62 at the end of August, and the Australian currency will advance to 90 U.S. cents from 83 cents, while oil prices will rise, he says.
    Next year, Jen predicts, the greenback will outperform the euro, the yen and the pound as U.S. growth gathers momentum, while continuing to weaken against emerging-market currencies, which benefit the most from the global growth.
    Jen first started managing money in his last months at Morgan Stanley.
    “I had a small book for myself for three months, and I truly enjoyed it,” he says. “I learned a lot from being with
the traders.”
    He resigned from Morgan Stanley in April after BlueGold approached him and promised him a bigger portfolio to manage.
His education continues.
    “Trading requires skills that are not required as a strategist,” he says. “As a risk taker, how you control
emotions is absolutely critical.”
    That means not letting yourself get carried away. “When you make a lot of money, your natural emotion is that you are right, and you want to make more money and increase your positions,” he says. “To me, it’s one of the most challenging things. The trick is to convert the themes into actionable market ideas.”