UK Funds Prioritise FX Hedging: Survey
Posted by Colin Lambert. Last updated: November 1, 2023
The latest in a series of surveys published by MillTechFX finds that three-quarters of UK fund managers hedge their currency risk and of those that do not, 95% are considering doing so given market uncertainty.
The report is part of a series that the firm says is intended to provide a window into how fund managers across the globe are adapting their FX risk management practices and their priorities to stay ahead of the curve. In September, it published a survey into North American fund managers’ thinking, and it has also published two geographical-based surveys on corporate treasury thinking.
Although volatility has decreased since peaking towards the end of 2022, the share of fund managers hedging a large proportion of their FX exposure grew from 46% to 56% in 2023, MillTechFX says. Similarly, the average hedge ratio was between 40-49%, with 68% fund managers citing this as higher compared to last year.
Despite the recent calming of market volatility, the survey finds that currency movements are still having a significant impact on fund managers and out of those surveyed, 77% said their returns have been affected by GBP volatility. Three-quarters believe that the cost of hedging has gone up over the past year.
Looking ahead, many fund managers are still prioritising risk management with over half planning (51%) to increase their hedge ratio and 50% preparing to increase their hedge window over the next 12 months.
Continuing a theme from recent surveys by the firm, this latest study reports that 73% of fund managers believe there is a lack of transparency in the FX market, with cost calculation (33%) being the biggest challenge they face when dealing in FX.
The most challenging aspect of fund managers’ FX operations is manual processes (39%), followed by onboarding liquidity providers (35%), getting comparative quotes (35%) and demonstrating best execution (33%). The majority of fund managers (79%) are looking into new technology platforms to automate their FX operations, with improved returns (31%) and operational risk reduction (31%) being the top drivers.
Again, following the themes from the other surveys, following the recent crisis at Silicon Valley Bank, Credit Suisse, First Republic and Signature Bank, 80% of fund managers are exploring diversifying their FX counterparties while three-quarters regularly monitor their FX counterparties’ credit ratings and 56% of larger fund managers said that their FX counterparties must have strong ESG credentials compared to just 30% of their smaller peers.
“Our research shows that fund managers aren’t out of the woods yet when it comes to the threat of currency movements and the majority are renewing their focus on hedging regardless of whether volatility returns or not,” observes Eric Huttman, CEO at MillTechFX. “While there will always be some that don’t hedge at all, many are deciding to hedge a higher amount of exposure to protect their returns.
“Many fund managers are still reliant on manual processes to transact in FX which can be both extremely inefficient and a huge drain on time and resources,” he continues. “It’s therefore encouraging to see that most fund managers are starting to move away from this model and instead embracing digitisation. Automation of previously manual FX processes can bring major benefits such as centralised price discovery, creating an end-to-end workflow, heightened transparency and faster onboarding – all of which can provide fund managers with a clearer view of their FX costs as well as greater operational efficiency.”
Reiterating a comment he made in another recent survey, Huttman adds, “The rise in ESG as a key business priority is more than just box-ticking. Many of our clients now ask about our own ESG practices before deciding to work with us, and our research shows that nearly half (44%) mandate that their counterparties have strong ESG credentials. It’s important to our clients, and it’s important to us.”