By Gertrude Chavez-Dreyfuss
NEW YORK, July 7 (Reuters) - After being in the doldrums the past year, risky carry strategies are slowing making a comeback and asset managers are taking advantage.
In a gathering of currency professionals in Manhattan on Tuesday, strategists and portfolio managers were optimistic about global economic prospects and are starting to make minor bets on higher-yielding currencies in emerging markets.
"Risk appetite is clearly on the mend," said the Boston-based Samarjit Shankar, director of global strategy at Bank of New York Mellon. As a result, "carry trades are slowly creeping up, although asset managers are getting selective. Right now, they're going into emerging markets."
Carry trades refer to strategies that involve borrowing in a low-yielding currency such as the yen and dollar and investing in higher-yielding assets. These trades were crushed after the global economy plunged into recession in the middle of last year, followed by the collapse of U.S. investment bank Lehman Brothers in September 2008.
Investors sold their holdings of riskier assets at the height of the financial crisis and sought shelter in the dollar and yen.
That started to change, however, after March this year as investors waded back into carry trades. According to data presented by Wooster Asset Management, carry strategies have garnered returns of about 4.5 percent since the beginning of 2009 after being hammered in 2008.
"If you want to do carry trades, you should definitely go outside G10 currencies," said Erik Postnieks, Wooster's chief investment officer. He cited data showing returns of as much as 23 percent in a carry portfolio.
What currencies are asset managers buying?
The clear stand-outs are commodity-based currencies such as the Brazilian real and South African rand, which have done well in 2009. These units have benefited from a 23 percent surge in the commodity index <.CRB> from April to mid-June.
Generally higher interest rates have also boosted the currencies -- Brazil's rates are 9.25 percent, while South Africa's are at 7.5 percent.
Interestingly, the currencies that have outperformed in 2009 were those that were oversold in 2008, participants in the conference said.
"I think investors' foray into emerging markets is not so much about growth optimism. It's all about value," said Mike Moran, senior currency strategist at Standard Chartered.
"There are pockets of optimism but investors aren't really buying emerging markets because they're bullish on risk. They're buying EM because they had been oversold."
Moran also cautioned about being too positive on carry trades. "We are certainly not back to conditions during the carry trade's heyday. They're not as attractive as before."
However, Moran said he thinks carry conditions will definitely improve within the next six to twelve months. (Editing by Dan Grebler)