Survey Finds Asset Manager Disapproval on Pre-Hedging
Posted by Colin Lambert. Last updated: October 29, 2025
A survey of senior traders at 34 European asset managers has found widespread unhappiness at the practice of pre-hedging, with more than 80% stating dealers should only be allowed to hedge after a trade has been awarded.
The survey, conducted by Acuiti and commissioned by pre-hedging sceptic Susquehanna, is the latest to discover that the industry is divided on the subject, observing that advocates claim it allows dealers to offer tighter spreads, while for detractors it represents a conflict of interest. For its part, Susquehanna says it agrees with the latter view and “believes that pre-hedging is unacceptable and should be banned as dealers using such information can have a detrimental impact on the price received by the end-investor”.
The survey finds that 92% of the traders at the 34 firms agree that pre-hedging “has the potential to move the price away from their trade and provide a disadvantageous price”. While 70% were “very” or “somewhat” familiar with the practice, this has not translated into acceptance, with 83% stating, as noted, that a dealer should only hedge after the trade has been awarded.
Acuiti observes that in general asset managers are understanding of dealers’ need to manage risk, but no respondents said that pre-hedging was always a legitimate risk management practice and 41% said that it is not acceptable as it creates unfair advantages.
Of those that thought pre-hedging was acceptable in certain instances (47%), most said this was when there is a genuine risk management objective. Acuiti says smaller numbers thought it ok in instances in which the dealer is executing a larger trade, or trading in volatile markets.
The report also notes that there are “significant concerns” around the increased market impact if multiple dealers pre-hedge the same RFQs and about dealers exiting positions quickly (to their benefit) where they pre-hedge but then do not subsequently win the trade. As a result, Acuiti says only 13% of the subset of respondents who thought pre-hedging was acceptable in certain scenarios, said pre-hedging is acceptable in a competitive bidding scenario.
Something that is widely seen as a path to acceptance of pre-hedging, by advocates at least, is in disclosure, but here the survey has a disturbing finding. Not a single respondent said their dealers always disclosed pre-hedging activity, and only 4% said their dealer “sometimes” disclosed. It should be noted that 43% said they were unaware of their trades being pre-hedged, but that still leaves 53% who say their dealers do not disclose.
While 53% said they had not observed pre-hedging activity by their dealers, 6% said they had “frequently” and 41% “occasionally”. One-fifth of respondents have mechanisms in place to look for pre-hedging activity, while 55% said they did not, but were considering it.
With IOSCO still to publish its long-awaited guidance on pre-hedging, the survey found sympathy for dealers’ challenges when managing the risk, but 41% said that the practice should be more strictly regulated with clear disclosure requirements and 37% believed this should include outright restrictions in certain cases. Just 15% thought current regulations are sufficient, while 7% argued pre-hedging should remain unrestricted.
Equally, 59% believe that dealers should always disclose on a trade-by-trade basis, while 30% believed disclose is only required for large or illiquid trades – the survey does not define “large”. Again, there is a sub-set who have no problem, 11% believe trade-by-trade disclosure would hinder market efficiency. Half of respondents believe that a dealer should be required to get consent from the client prior to engaging in pre-hedging, although 36% believed this should only be required for large and illiquid trades and 14% believed such a move would hinder market efficiency.
The Full FX View
The good news from this survey, albeit one with limited scope, is that 70% of respondents were aware of the practice of pre-hedging – although whether this is across asset classes is unclear, but important given the different market structures. The bad news is that there is a hint in the findings, of a lack of understanding over the impact of their trades.
We should probably not be surprised that the buy side doesn’t like pre-hedging, and it is hard to argue with the 92% that believe the practice can affect the price they receive, but the issue is not that clear-cut, as we have discussed previously in these pages. That said, however, it worries me when a small sub-set of those who found it acceptable did not do so in a competitive bidding scenario. Presumably, these firms tell the dealers they are in competition (not all do!), but by doing so they leak information, especially if another dealer skews and doesn’t win the trade.
In a competitive situation, the direction of the trade is often obvious, or even provided, thus multiple dealers may be pre-hedging, which increases the likely detrimental effect on the price, but it also provides a problem for the dealers in “winner’s curse”. The more people that know about the trade, the higher the market impact, and it is not clear from the survey’s findings that this is clearly understood. If it was then those approving of pre-hedging, but not in a competitive scenario may have answered differently.
Recent cases and studies that have been public have highlighted that pre-hedging can benefit the client in terms of actual price versus what would have been quoted, but the problem remains a lack of real guidance or controls over the process. As has been noted before in these pages, every trade involves different circumstances and market conditions, and as such putting parameters on the practice is different – this has led to some, Susquehanna included, to call for a ban.
Personally, a ban would not bother me in the slightest, because it would remove a very real conduct and legal risk from the FX market at least, but such a move has to come with an understanding that spreads will be wider – although the reality is they will probably more accurately reflect the cost of risk transfer! Equally, if banned, clients will need to understand the increased risk the dealers are taking on in a competitive scenario – again this contributes to the spread. One good thing to come from such a move would be, presumably, that clients will be automatically suspicious of any dealer quoting too tight a price!
The industry is awaiting the white smoke from IOSCO to signal the regulatory body has come up with appropriate guidance over pre-hedging (if it is indeed that clear). Given the consultation that is feeding the IOSCO guidance ended some time ago, the timing of this survey is not as helpful as it could have been. The only hope is that the asset managers who participating in the Acuiti survey, provided feedback to IOSCO – that way the buy side’s view will be heard.
Of course, evidence such as this provides momentum for the banning of pre-hedging, because after all, the banks listen to their clients and respond to their needs don’t they? Well, they do most of the time, but not, it seems, when it comes to pre-hedging, but before we cast aspersions on this, we need to remember that taking on large risk has become more complicated and costly for dealers thanks to regulation and their structural change that led with electronic trading, which is really built for small amount trading.
As I suspect IOSCO is discovering, there is no easy answer to the pre-hedging conundrum, but for what it’s worth, to protect the dealers, it should probably be banned. I understand the focus on the client and wanting to provide them with a tighter price, but that tighter price more often than not comes with a higher profit for the dealer, thanks to the pre-hedging. If these deals are priced “correctly”, the dealer can take on the risk and the level of profit (or otherwise) will mostly be dictated by the skill of their traders (both e and voice)…if they actually have any and not merely brokers under a different name.
