A new report from MillTechFX, has revealed that nearly nine in 10 UK fund managers (88 per cent) now hedge their forecastable currency risk. This is a significant increase from 75 per cent in 2023, highlighting a growing need to protect returns against market volatility, the firm says.
The firm writes that the MillTechFX UK Fund Manager CFO FX Report 2024 is the latest instalment of the firm’s global research series, gathering insights from 250 finance leaders at UK fund managers to reveal their FX challenges and hedging strategies.
The report found that geopolitics is having a significant impact on UK fund managers’ FX hedging strategies. Despite 84 per cent experiencing an increase in the cost of FX hedging in the past year, 55 per cent plan to increase their hedge lengths and 33 per cent 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. Of those not hedging, over half (53 per cent) are now considering doing so due to current market conditions. They are also diversifying how they hedge, with 86 per cent using FX options more frequently.
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 per cent), the impact of policy changes on currency values (38 per cent) and increased volatility (38 per cent). These concerns appear valid, as the U.S. dollar posted its biggest gain in eight years, while the euro, sterling, and yen have all declined off the back of the result.
Other notable findings include:
The stronger pound’s big impact – The stronger pound in 2024 has had an overwhelmingly positive impact on fund managers, with 87 per cent saying it positively affected their returns.
Adapting to T+1 – To adapt to the faster T+1 settlement cycle in the US, UK fund managers focused on upgrading technology infrastructure (33 per cent), extending working hours or shift adjustments for staff (33 per cent) and engaging additional external services (33 per cent).
AI and automation on the rise – 93 per cent of respondents are considering implementing AI, and the automation of manual processes was their second highest priority (34 per cent). The key FX areas where automation is being implemented are settlement (34 per cent), the full FX workflow (34 per cent) and risk identification (33 per cent).
Fund managers’ key challenges and priorities – The key challenges for fund managers were cost calculation (37 per cent), manual processes (36 per cent) and onboarding liquidity providers (34 per cent), while their biggest priority was transparency of costs (35 per cent).
A reliance on manual processes – The top methods of instructing FX transactions were email (42 per cent) and over the phone (35 per cent), demonstrating a persistent reliance on manual processes.
Tougher lending criteria and interest rates – The vast majority of UK fund managers have noticed tighter lending criteria (68 per cent) and increased interest rates or fees (88 per cent) from their credit providers over the last year.
Eric Huttman, CEO of MillTechFX, says: “As 2024 draws to a close, UK fund managers may finally find a moment to catch their breath. 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. 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. 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.”
