Fund Managers’ FX Challenge Increasing: Survey
Posted by Colin Lambert. Last updated: November 16, 2022
A new report from MillTechFX finds that challenges are increasing for fund managers thanks, unsurprisingly, to the increasingly volatile nature of currency markets.
The firm says it surveyed 250 senior finance decision markets at fund managers and found that FX exposure from foreign currency assets, management fees, investor capital and at portfolio level has increased in recent years. Over two thirds (70%) of respondents said that the number of cross border investments in their firm had increased over the past five years, while 66% experienced an increase in non-base currency investors in their funds. Overall, 93% of respondents stated that FX was significant to their business.
MillTechFX says fund managers are dedicating “considerable resources” to FX with over half tasking at least three people with FX-related activities. Paradoxically, only 15% said their set-up was best in class, while 33% said it was either below average or worst in class.
The biggest challenge found by the survey when dealing with FX is fragmented service provision (35%), MillTechFX says. This was followed by securing credit lines (34%), cost calculation (33%) and forecasting exposure (28%). When it comes to their FX operations, the biggest hindrances facing fund managers are demonstrating best execution (43%) and getting comparative quotes (40%).
The survey also found increasing importance on ESG, with 58% of fund managers saying their FX counterparties must have strong ESG credentials, while 36% said that it was an important consideration. Only 6% said it wasn’t part of their decision-making processes.
Elsewhere, 84% of senior-finance decision makers surveyed said they were looking into new technology and platforms to automate their FX operations, while 32% said automation of manual processes was the most important factor in terms of FX management. There are still some barriers to outsourcing for many fund managers. These include a perceived lack of control (41%), high costs (36%) and integration (35%).
“Volatility has dominated the foreign exchange market so far in 2022, driven by high inflation, rising interest rates and geopolitical issues,” says Eric Huttman, CEO at MillTechFX. “As a result, FX risk management has become a strategic priority for fund managers who need to protect their returns against currency moves.
“Despite this threat, fund managers are struggling with a number of issues when it comes to their FX setup, such as best execution, operational inefficiencies, transparency and governance,” he adds. “This has led the vast majority of senior finance decision-makers to explore new technology and seek to embrace digitisation in a bid to streamline operational processes. Looking ahead to the rest of 2022 and beyond, we would encourage firms to get the right processes in place now and seek alternative technology-driven solutions that can help them achieve best execution and protect their business during these turbulent times.”