Introduction: The real impact of effective FX hedging

An FX hedge is a transaction placed to insulate a current or future position from undesired movements in foreign exchange rates. In this report, we note that effective FX hedging can have a major impact on the performance of an asset manager’s products, ensuring, for example, that the performance of a share class mirrors that of a fund’s base currency (share-class hedging) or in managing risk associated with movements in currencies in which a fund’s underlying assets are denominated.

Previously, many asset management companies bought an FX share-class hedging service as part of a bundled securities services package. Our expert commentators note in this report that it is becoming increasingly common to purchase this as a specialist, standalone solution, with the asset manager running a dedicated RFP process to select the best provider in market to meet their existing and future requirements.

FX hedging sits at the interface of the investment book of record, the custodian book of record and the dealing book of record maintained by the transfer agent. Strong performance relies heavily on managing the data flows efficiently between these data centres. This demands data accuracy and data timeliness, getting the right data to the right place at the right time – not only when the FX hedge is executed, but also in managing this flow back into the investment book of record.

In the FX hedging roundtable, asset management participants tell us they are looking closely at their oversight models and taking steps to enhance the oversight and governance standards around their FX hedging activity. This includes regular service reviews, detailed attention to key performance indicators and analysis of transaction costs incurred across the FX hedging programme.

For asset managers that utilise FX hedging strategies, automation and technology investment are increasingly at the forefront of their attentions from portfolio management teams right through to the automation of downstream operational processes. The aim is to remove all possible slippage in the hedging programme – eliminating potential time delays and operational risk generated by manual error.

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