| Currency hedging gaining ground among investors |
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| 14/05/2006 | |
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The flow of currency overlay and fund mandates is being nourished by local authorities. After the Lothian pension fund in March, the £8.5bn Strathclyde pension fund has hired three currency managers. Mellon Capital Management, Millenium global Investments and Record Currency Management will each manage £150 active currency overlay mandates These new currency mandates follow similar moves by the Leicestershire County Council Pension fund, as well as the London Borough of Brent Pension Fund. Other funds that are said to be looking into currency overlays include the Cornwall Pension Fund, as well as the the £1.3bn Berkshire Pension Fund (Royal Borough of Windsor & Maidenhead), which has just tendered a £410 currency overlay mandate. According to Hymans Robertson's survey of the 50 largest fund management firms in the UK, currency overlays and currency pooled funds have shown the largest increase in alternative assets under management for those firms from 2002 to 2006. Two types There are two broad types of currency strategies. A passive currency overlay seeks to reduce the volatility of a portfolio that stems from the assets that are denominated in foreign currency. Usually, the currency manager attempts to neutralise the currency risk by selling the foreign currency forward. For this purpose, the pension fund can use either a pooled or segregated fund. A segregated fund will be tailored so as to perfectly match the portfolio exposure, while a cheaper pooled fund holding various currency forwards will provide less of a hedge. Investors are usually advised not to hedge their entire portfolio since it could lead to an unintended net short position in a currency. Hedging some of the smaller and less liquid currencies can also be expensive and difficult to implement. While the degree to which the currency risk should be hedged by long-term investors is frequently discussed, currencies are now seen as a standalone source of alpha by an increasing number of investors. Under an active currency overlay mandate such as the ones awarded by the Strathclyde pension fund, the objective is to get value out of currency exposure by taking long and short bets. This is what fund managers mean when they present currency as an asset class on its own. As one of the most liquid markets in the world with average daily transactions of almost US2 trillion according to Russell, the multi-management company, managers usually argue that value can be extracted out of this market, which holds players that operate without a profit motive, such as tourists on vacations or airline companies buying fuel in foreign currency. This, they say, is creating inefficiencies that can be exploited. According to an investment consultant, the most common approach is to use a pooled fund with a nominal value of approximately 10% of a fund's international equities exposure and an objective of achieving somewhere in the region of 1-1.5% of additional alpha on the overseas equities portion of the scheme. It can be implemented with or without a passive currency hedging. J.L. |
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Articles of the same Topic : Currencies |
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