Currency Management

Institutional investors are increasingly managing multiple currency exposures in today’s global financial markets. Our currency management service provides foreign exchange execution and currency hedging solutions to help minimize risk, reduce costs and increase efficiency.

Investors need to carefully balance portfolio risk and return. While global diversification offers the opportunity of new alpha sources, it also introduces currency exposure risks.

We build our solutions to meet your specific currency management needs; whether you require share class hedging, portfolio hedging or portfolio hedging at a share class level. As an outsourced service, we take direction from you.

An automated, straight-through process

Prior to implementation, your dedicated project manager will work with you to ensure all the program’s parameters and requirements are communicated and documented. Our analytics team will determine optimal parameters for your consideration and decision. The team will closely coordinate with data agents and focus on automation to help mitigate risk and improve efficiency.

Share class hedging

Our focus is on operational risk control and performance of the share class. To manage risks, we use customized modules designed to systematically import and verify data from various agents, while for performance, our process focuses on benchmark pricing. Our goal is to maintain the target hedge while considering variations due to both net-asset value changes and investors inflows and outflows. All cash flows are executed at a benchmark spot rate to correspond with the valuation rate used in fund valuation and accounting. We aim to reduce the impact of data lag by executing currency trades attributed to changes in net asset value (NAV) as soon as practicable. We can accommodate flexibility in hedged tolerances, benchmark index current exposure usage, forward contract tenor, proxy hedging, and counterparty rules and limitations.

Portfolio hedging

Our portfolio hedging solutions focus on removing operational risks while considering the trade-off between tracking error and transaction costs. Tracking error associated with a rules-based overlay is caused by a combination and rebalance frequency, hedge filters and interest rate differentials. More frequent rebalancing can increase transaction costs and less frequent rebalancing can cause higher tracking error. Our sophisticated simulations help to illustrate the relationship between transaction costs and tracking error.

Traditionally, a strategic hedging policy in a rules-based strategy defines a target ratio to apply to foreign currency exposures. We apply this target hedge ratio to your portfolio exposures to determine the amount of currency to be hedged. This will operate within a band that is either a percentage of target hedge ratio or an absolute value. This will help to eliminate trades resulting from noise.

Benchmark hedging

You can access two types of benchmark hedging services:

Benchmark weight hedging involves hedging exposures based on the currency weights of a published unhedged benchmark. This is frequently used by active and semi-active funds, where FX-related tracking is often due to interest rate differentials, hedge ratio and investment ratio mismatches, and transaction costs and data lags.

Currency-hedged benchmark replication involves hedging exposures based on the currency weights of a hedged benchmark, commonly used by passive funds where FX-related tracking error is due to unrealistic benchmark construction rules and transaction costs.