UK Fund Managers Increase FX Hedging: Survey

The rise in geopolitical tensions and the US election, have led UK fund managers to increase their FX hedging activities, with 88% now saying they hedge their foreseeable currency risk, up from 75% in 2023.

The finding comes in the latest in an almost bewildering number of FX surveys published by MillTech FX (this is the eighth this year with surveys dedicated to UK corporates, North American funds, North American corporates and European corporates and Euopean fund managers – all of whom survey 250 people), and highlights, the firm says, “a growing need to protect returns against market volatility”.

The report found that despite 84% experiencing an increase in the cost of FX hedging in the past year, 55% plan to increase their hedge lengths and 33% plan to increase hedge ratios due to rising geopolitical tensions. By extending hedges and hedging more of their exposure, UK fund managers are attempting to lock in certainty for longer, MillTechFX observes, adding that of those not hedging, 53% are now considering doing so due to current market conditions.

As was the case with the recent survey of 250 UK corporates, UK funds are also diversifying how they hedge, with 86% using FX options more frequently.

Unsurprisingly, the US election was a major geopolitical event that significantly influenced FX hedging strategies. Leading up to the election, fund managers were most concerned about unpredictable market movements (40%), the impact of policy changes on currency values (38%) and increased volatility (38%). “These concerns appear valid,” MillTechFX says. “As the US dollar posted its biggest gain in eight years, while the euro, sterling, and yen have all declined off the back of the result.”

In spite of that decline in Cable post-the US election, the survey also finds that UK funds have enjoyed “an overwhelmingly positive impact from the stronger pound”, with 87% saying it has positively affected their returns. Given the higher expense of repatriating funds with a strong currency, this presumably reflects successful hedging strategies or a large number of offshore investors in the funds.

Elsewhere, as has been noted previously, funds seem to have adapted to the T+1 change in North America, the survey found that an equal amount of respondents, 33%, focused on upgrading their technology infrastructure; extending working hours or shift adjustments for staff; and/or engaging additional external services, to meet the demands of the change.

Inevitably, AI is a focus, with 93% “considering” implementing the technology (UK corporates were at 100% for this question), with 34% stating automating manual processes was their second highest priority, equally split across settlement (34%), the full FX workflow (33%), and risk identification (33%).

In spite of the interest in AI and automation more generally, the top methods of instructing FX transactions were email (42%) and over the phone (35%), demonstrating a persistent reliance on manual processes.

Cost calculation (37%), manual processes (36%) and onboarding liquidity providers (34%), were key challenges for this sector, while their biggest priority was transparency of costs (35%). Finally, MillTechFX says the vast majority of UK fund managers have noticed tighter lending criteria (68%) and increased interest rates or fees (88%) from their credit providers over the last year.

“As 2024 draws to a close, UK fund managers may finally find a moment to catch their breath,” observes Eric Huttman, CEO of MillTechFX. “Global conflicts have been a continued source of geopolitical instability, causing heightened currency volatility for fund managers. Whilst the outcome of the recent US election has already had a large impact on all markets, the longer-term impact on markets from the new administration’s future policies will create significant uncertainty for finance leaders. It’s encouraging to see more fund managers hedge their FX risk and secure some level of protection, though there are still those with unhedged currency exposure that risk severe financial consequences.

“Fund managers must now decide whether the cost of hedging is worth the potentially unlimited cost of not doing so,” he continues. “In addition, how to hedge is just as important of a decision to make as whether to hedge. Well-thought-through changes to firms’ hedging strategies, as we’ve seen in the form of increasing hedge lengths and ratios, can help provide stability to protect returns from turbulent markets. On top of all this, higher FX hedging expenses are eating into returns at a time when effective hedging is more critical than ever. As tighter access to finance and increased fees and rates further ramp up the cost of doing business, fund managers may feel the walls beginning to close in around them.

“In this challenging environment, it is crucial for fund managers to closely monitor markets and continue to assess their FX strategies to ensure they’re providing adequate protection,” Huttman concludes. “They also need to review their FX setups to eradicate manual processes, review legacy relationships to ensure they’re getting a good deal, leverage technology to drive efficiencies and look to tools such as margin-free hedging to help them protect and maximise their returns.”