Amid a year of geopolitical turbulence and currency
volatility, UK fund managers are boosting their FX hedging strategies. A recent
report showed a remarkable 88% of fund managers now hedge forecastable currency
risks, up significantly from 75% in 2023.
Geopolitical Tensions Drive Hedging Strategies
The report by MillTechFX showed that unpredictable
geopolitical developments, including the recent US election, have compelled UK
fund managers to adopt more robust FX hedging measures.
Concerns about market volatility, shifting policies,
and fluctuating currency values have led 55% of managers to extend hedge
durations, while 33% have increased hedge ratios.
Even among those who previously avoided hedging, over
half are reconsidering their stance due to volatile conditions. The study
highlighted the broader adoption of FX options, with 86% of fund managers using
them more frequently to manage risks.
Commenting about the finding, Eric Huttman, the CEO of
MillTechFX, said: “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.”
“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.”
While hedging offers stability, it comes at a growing
price. A notable 84% of fund managers report increased FX hedging costs
compared to last year. Despite these challenges, the emphasis remains on
securing predictable returns.
The pound’s fluctuating strength in 2024 has also
shaped fund strategies. After hitting a two-year high against the dollar, the
stronger pound delivered tangible benefits: 87% of fund managers reported
improved returns.
Mid-sized funds, managing £400-800 million in assets, reportedly
felt the strongest positive impact from the pound’s performance. This strength
enhances purchasing power for dollar-denominated assets and boosts portfolio
diversification.
T+1 Settlement Adjustments
With the introduction of the faster T+1 settlement
cycle in the US, UK funds have adapted by upgrading technology, restructuring
working hours, and engaging external services. Each of these strategies was employed by 33% of
surveyed managers, reflecting the sector’s readiness to embrace operational
changes.
Automation and AI are reshaping fund management
workflows. A striking 93% of fund managers plan to adopt AI, particularly in FX
settlement processes and risk management.
However, manual processes like email and phone
transactions still dominate but are gradually being phased out. UK fund
managers prioritize cost transparency as they contend with hidden fees embedded
in FX transactions.
This article was written by Jared Kirui at www.financemagnates.com.
Feed from Financemagnates.com
