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Hedging: understanding the bigger picture

In our previous blog, we looked at ways of dealing with (pooled) investments with foreign currency exposure and discussed the use of an overlay solution at the aggregate level. This time we want to go up another level and look at portfolios from an overall perspective. Rather than focusing on individual funds and hedges, we want to look at the bigger picture. In particular, we want to look at aggregate currency exposure risk and what you can do to mitigate it and how.

03 May 2019

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Foreign exchange risk is omnipresent when you have international assets (i.e. non-Sterling denominated). One of the principal risks with foreign exchange (forward) transactions are poorly executed trades, whereby you receive a sub-optimal rate, which can lead to higher transactions costs.

From an investment  perspective, the subject of mitigating foreign exchange risk throws up many questions. If you have a hedge at an aggregate level, for example, how do you ensure that your exposure is calculated in the most appropriate manner? And how do you combine the valuation of your portfolio from different funds and portfolios to gain greater insights into your overall exposure? Most importantly, where do you get all the information to calculate this exposure?

Going it alone

One approach might be to do it yourself. Taking matters into your ‘own’ hands is something that we view as a great step forward as it provides you with more efficiency, more transparency and more control over your currency hedge (at the total level)  For instance, you could nominate someone internally to collect all the relevant information in an excel spread sheet and then start calculating the exposure using valuation data from your fund accounting system/provider, your custodian and/or the fund manager(s). But doing it yourself  is a complicated, highly protracted process and, in many cases, a manual process (involving spreadsheets) with all the accompanying risks.

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Also, think for a moment about all the different investments you hold. You might, for example, have some UK equity funds, a European gilt portfolio, some investment funds that track the MSCI World Index and a range of emerging market funds all grouped together. Collecting and evaluating this diverse range of exposure information on all your (different types) of investments is a big ask for a team of people, let alone one individual.   

Alternatively, you could use a third party overlay provider to do the work for you. At KAS BANK, for example, our platform (KASHedge) can help you hedge your exposure at the total level. We can guide you through the process, sourcing all the appropriate information, making the required exposure calculations, using Straight Through Processing, all while maintaining full transparency and being fully in control over the currency hedge on your investments. Importantly, this results in you having one hedge across all your portfolios, so the scheme and its members get to enjoy the consequent cost savings as well!

Our final blog in this series will go into more detail about the solutions we offer.

Stay connected, we keep you up-to-date

Matthijs Verweij

Contact Matthijs to find out more

Matthijs Verweij

Business Development Manager
+31 (0)20 557 2629