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Hedging: Bringing It All Back Home

Our five previous blogs on currency hedging raised a host of difficult questions on the technical details of currency hedging and ways to structure a hedge. However, before we go on to explore a solution in this blog, let’s remind ourselves of what we’ve already covered.

29 May 2019

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Back in January, we began our first blog by posing the question: “How can you hedge your foreign currency exposure?”. We started by explaining how a ‘Forward Exchange Contract’ works. Then we went on to explain the factors that influence the ‘Forward Rate’ and how  this future rate differs from the Spot Rate.

Our second blog looked at the impact of using Forward Exchange Rates on a pension fund’s returns and how to calculate the result of a Forward Exchange Contract. In particular, we highlighted the importance of factoring in all the elements in the process, including the interest received on a foreign currency investment, which can offset the loss due to a change in the spot exchange rate.

Blog number three turned its attention to ways of minimising exchange rate volatility on a portfolio. We concluded that a carefully crafted ‘overlay strategy’ could help mitigate that foreign currency risk, leaving the pension fund in full control of its investments.  

Our fourth blog in this series went deeper still, examining ways of dealing with different types of investments. Here, we put forward the case for a separate overlay solution that isn’t part of a pooled investment vehicle, illustrating this with a real life client example.

Finally, our most recent blog stepped back to consider the bigger picture. In particular, we looked at the importance of gaining an overall perspective. Rather than focusing on individual funds and individual hedges, we encouraged scheme managers to look at their aggregate currency exposure risk and what they could do to mitigate it.

Foreign currency solutions

Now let’s explore some possible solutions.

Today, pension funds face many issues. At a macro level these include funding worries, increasing regulation and increasing pressure for better  scheme governance. At a more granular level, meanwhile, the vexed issue of currency hedging also looms large in many trustees’ minds. Our final blog in this series, therefore, seeks to tie this all together, highlighting the currency hedging solutions that KAS BANK can offer and the positive impact this can have on good governance and improved operational efficiency.

As we’ve already discussed, bespoke currency hedging is often provided by the fund manager – in many cases, only on the portfolio managed by the fund manager – but this comes at a cost to the scheme. Alternatively, hedging may be provided by the custodian bank, but this can be complicated to administer, especially when not all the positions that need to be included in the hedge are held in custody (e.g. pooled funds). Consequently, many pension funds either leave their investments unhedged or opt for a hedged share class in a pooled fund. But there is another solution…

In partnership with fintech specialists, MatchingLink, we have developed a currency hedging solution that fits pension funds of all shapes and sizes.  Our ‘KASHedge’ overlay platform seamlessly integrates the position/exposure and treasury (FX) aspects of KAS BANK for the benefit of the pension scheme. By creating a  ‘straight through processing’ route, from exposure calculation to the actual hedging and back to the reporting, KASHedge tightens the governance around foreign currency hedging and adds transparency to the hedge and hedging process.

Additionally,  the KASHedge platform also facilitates a more active role for the investment consultant in the hedging process, giving them  access to the hedging workflow and enabling them to authorise transactions via KASHedge’s online portal.

Elsewhere, we can also include ‘look through reporting’ for pension funds that are invested in pooled investment vehicles.  By using ‘look through’ with pooled fund investments, KASHedge is able to calculate the true exposure in a pooled investment based on the underlying line by line investments in the fund. This way pension funds are able to hedge currency risk more accurately and look through reporting can be applied to all pooled fund investments in the portfolio of the pension scheme.

In short, we believe that our deep knowledge and proven experience in custody, reporting, overlay and administration services, makes us uniquely qualified to provide pension funds with a bespoke yet fully automated currency overlay solution. The structure of our platform gives all schemes – large and small – the opportunity to accurately hedge the true exposure of their portfolio and leads to more transparency, stronger governance and operational and cost efficiencies.

KASHedge is just one example of the range of products KAS BANK offers. If you would like to learn more about how KASHedge or our other solutions can help you strengthen your scheme governance, create more transparency and allow you to always be in control of your investments, please contact Matthijs Verweij to find out more.

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Matthijs Verweij

Contact Matthijs to find out more

Matthijs Verweij

Business Development Manager
+31 (0)20 557 2629