FX Traders Ousted From Morgan Stanley Thrive at Brazilian Funds

For the pair of currency traders who left Morgan Stanley after a contentious internal probe into alleged wrongdoing, leaving the investment bank has turned into a lucrative trade.

(Bloomberg) — For the pair of currency traders who left Morgan Stanley after a contentious internal probe into alleged wrongdoing, leaving the investment bank has turned into a lucrative trade.  

Thiago Melzer and Rodrigo Jolig helped oversee FX options at Morgan Stanley, a business that generated hundreds of millions of dollars for the New York-based bank, until the two were suspended in 2019. They left in 2021 and founded hedge funds in their native Brazil that are generating double-digit returns, according to company documents and data compiled by Bloomberg.

Melzer, global head of FX options at Morgan Stanley until the probe, is co-founder and chief investment officer at Upon Global Capital, a Sao Paulo-based hedge fund that has gained 23% after fees since the start of last year through Tuesday, the documents show. Jolig, who ran emerging-markets FX options and reported to Melzer, is now CIO at Alphatree Capital, which has risen 21%. 

Brazilian hedge funds enjoyed the best returns for six years in 2022, profiting from surging interest rates and political instability brought on by Luiz Inacio Lula da Silva’s narrow election win, even as some of their investors yanked their money out and flocked to safer assets. The volatile environment is providing a new lease of life for the two traders, who might have faced challenges in finding work at a global investment bank after their exit from Morgan Stanley, recruitment experts said. 

In an initial disclosure made to the US Financial Industry Regulatory Authority at the time of their departure, Morgan Stanley cited allegations concerning their valuing of certain trades and the use of unapproved communication methods. Melzer disputed the findings and a FINRA arbitration panel ruled in his favor in September, ordering the official explanation for his exit to be changed to the bank’s “perception of his supervisory actions, which were not related to any securities, customer interaction or sales practices.” 

But Wall Street firms have become increasingly risk-averse in their hiring practices since the financial crisis, said Jason Kennedy, chief executive officer of recruitment firm Kennedy Group. Traders who have been officially dismissed by one investment bank can struggle to get past the background checks of another, he said.

Even hedge funds, which face far less regulatory scrutiny than banks, have become more conservative when it comes to seeming red flags, he said. The best option is to set up your own fund, he said. 

Melzer and Jolig declined to comment. 

The pair can still “professionally flourish and profit from the risk-loving entrepreneurial settings” at their hedge funds, said Anna Tavis, a professor of human capital management at New York University and a former senior recruitment executive.

However, careers in the traditional financial-services sector are “ladders with multiple guardrails” and any alleged misstep “is almost a dead end with no return,” Tavis added.

Year-to-Date Gains

Melzer helped found Upon Global Capital in 2021 as he was leaving Morgan Stanley and it now has more than 490 million reais ($94 million) under management, according to Anbima, Brazil’s capital-markets association. Jolig helped set up Alphatree around the same time with backing from Brazilian property tycoon Elie Horn and it oversees about 450 million reais.

Both have outperformed the 14% gain posted since last year by the Anbima Hedge Funds Index, which tracks the performances of local hedge funds in Brazil. A local deposit rate, which Brazilian investors use a benchmark, gained 16%. The Bloomberg Macro Hedge Fund Index, which tracks money managers globally that make bets on economic trends, climbed 2% through the end of February, the data show. 

Many macro hedge funds reported double-digit returns in 2022 as they profited from the volatility caused by rising interest rates, record inflation and Russia’s full-scale invasion of Ukraine. This year has proved just as unpredictable: a banking crisis has taken down Credit Suisse Group AG and Silicon Valley Bank within weeks of each other and uncertainty over the direction of rates continues to shake global markets. Swings in the values of US Treasuries have been wilder than those seen during the collapse of Lehman Brothers Holdings Inc. 

Larger rivals have seen some of last year’s gains wiped out amid the turmoil. A fund at Said Haidar’s Haidar Capital Management has plunged 44% this year while veteran macro trader Adam Levinson is shutting his Graticule fund after losses, Bloomberg reported earlier this month. Brevan Howard Asset Management curtailed the betting of at least three of its traders after they hit maximum loss levels, Bloomberg also reported. 

Melzer and Jolig seem to have avoided similar blow-ups so far. Upon’s flagship fund has gained 2.7% this year and recently opened a long position in the Japanese yen while boosting bets on additional declines in the S&P 500 Index, according to the documents and data compiled by Bloomberg. Alphatree has climbed 2.2% with gains in equities and fixed income offsetting losses in currencies and commodities, the documents and data show. 

“Market, rates and FX volatility alongside a stratified geopolitical world provide the most ideal backdrop for macro hedge funds to make money,” said Gaurav Patankar, a hedge-fund analyst at Bloomberg Intelligence. “We expect these circumstances to sustain and be particularly beneficial to emerging macro managers.”

Read More: Emerging Macro Hedge Managers May Be Tailor-Made for 2023

The two traders helped lead Morgan Stanley’s push into the world of FX options, complex derivatives that investors use to speculate on the direction of currencies. With Melzer at the helm, the bank overtook rivals including Goldman Sachs Group Inc., data show. A person familiar with the matter estimated that the division generated about $800 million of revenue for the three years through 2018.

The strategy proved costly in 2018. Melzer’s team had amassed a large volume of trades linked to the Turkish lira with an obscure fund owned by China’s GF Securities Co. When the bets soured, the fund collapsed and its positions were taken over by its lender, Citigroup Inc. As officials at the New York-based bank sifted through the transactions, they questioned the valuations that the Morgan Stanley unit had placed on them.  

Morgan Stanley officials began to probe trading practices at the FX options unit in 2019. In November, the bank suspended the pair. The unit later posted a loss of about $150 million for the year on trades in Central and Eastern Europe, the Middle East and Africa, Bloomberg reported at the time. 

Mark Lake, a spokesman for Morgan Stanley, declined to comment. 

For Melzer, his exit from Morgan Stanley is now very much in the rear view mirror. 

“The ‘divorce process’ was a bit longer and more turbulent than I would have liked,” Melzer said in a podcast aired last year. “Everything was solved in a very satisfactory way and now I’m 100% focused on the fund.”

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