CURRENCY MANAGEMENT
from both institutions and their consultants. “I think there’s little new in the methodology of currency hedging and I don’t think that there are many new strategies, but I think what is new is the understanding of the need to do this - a better understanding of why and what currency does to your portfolio performance and how to use it to your EHQHÀW µ REVHUYHV *DU\ .ORSIHQVWHLQ head of Mesirow Financial’s currency management group.
I
$FFRUGLQJ WR .ORSIHQVWHLQ LQWHUHVW KDV boomed, although everything is relative. “A few years ago we were getting two or three inquiries a year looking for active hedging, now its up by D IDFWRU RI ÀYH DQG LW·V QRW EHFDXVH ZH·UH GRLQJ anything different, but the volatility of markets has PDGH SHRSOH UHFRQVLGHU FXUUHQFLHV µ KH DGGV
“There’s certainly a bigger interest internationally about active hedging and we’ve had a lot of meetings DQG GLVFXVVLRQV µ DJUHHV *LXOLR 0DUWLQL &,2 RI &XUUHQF\ 6WUDWHJLHV DW $OOLDQFH%HUQVWHLQ (YHQ VR PDNLQJ ÀUP GHFLVLRQV LV D OHQJWK\ SURFHVV DV WKHUH remains some confusion among managers as to which strategy is most suitable and is further complicated E\ ZKDW 1HLO 5HFRUG FKDLUPDQ RI 5HFRUG &XUUHQF\ Management, describes as the consultants default position of recommending passive hedging. “I wish I FRXOG VD\ ZH·UH VHHLQJ D ÁRXULVKLQJ LQWHUHVW LQ DFWLYH but although we are seeing some rising interest in DFWLYH VR IDU LW·V PRUH VSRUDGLF WKDQ JHQHUDO µ UHSRUWV 5HFRUG ´%XW WKH\ DUH UHFRJQLVLQJ D SUREOHP DQG GRLQJ VRPHWKLQJ DERXW LW µ UHDVVXUHV 0DUWLQL
Globalisation
The reason managers are taking a longer and more serious look at active hedging has been the hammering many investors have taken since the credit crunch began in 2008. Investors, in particular pension funds, have been taking a greater interest in international equity holdings. North American pensions have also joined the international party, moving away from an overwhelmingly home- dominated equity holdings.
“The fact is that as portfolios follow the globalisation story currency exposure is the uninvited guest at a
n terms of bringing something new to the story of active hedging, one of the most obvious changes has been a renewed interest in hedging
“The fact is that as
portfolios follow the globalisation story currency exposure is the uninvited guest at a global equity party,”
GIULIO MARTINI
JOREDO HTXLW\ SDUW\ µ VD\V 0DUWLQL ´,QYHVWRUV RIWHQ GRQ·W ZDQW LW µ
$FFRUGLQJ WR 1HLO 5HFRUG 8. PDQDJHUV KDYH DV much as 50% of their portfolios in international equities and bonds, losing their home bias. The impact of the currency element should not be underestimated: “The reality is that the combination of currency appreciation and higher yield, means that about 40% of equity returns came from the currency HOHPHQW VLQFH µ
And the volatility of both equity markets and currencies since 2008 have brought home some harsh realities to investors who either had no hedging strategy or for those with the most basic of passive hedging.
A common viewpoint has been that hedging currencies is a waste of time, that over the longer- term currency differentials will balance out, with hedging only bringing an unnecessary cost to the portfolio. “The argument has long been that returns IURP FXUUHQF\ RYHU WKH ORQJ WHUP DUH QHXWUDO µ H[SODLQV 1LJHO 5D\PHQW +HDG RI &OLHQW 3RUWIROLR Management at the currency management group of -3 0RUJDQ $VVHW 0DQDJHPHQW ´%XW IHZ SRUWIROLRV have that 20 year time horizon and can the trustees or managers live with the volatility over that period, especially if you look at what’s been happening over WKH SDVW IHZ \HDUV"µ
Autumn 2011 | Currency Investor 17
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