CURRENCY MANAGEMENT
And the primary way is the dynamic hedge, allowing managers to use their experience to move the hedge. “The ultimate objective for the client is to manage the risk and ask, what’s the optimal ratio? Not always HDV\ LQ WKH VKRUW WHUP µ ZDUQV 5D\PHQW ´:H·G VD\ adjust the hedge ratio framework by using metrics OLNH YDOXDWLRQ 333 HIIHFWLYHO\ VHHNLQJ WR LGHQWLI\ periods of serious mis-valuations and do so on a ELODWHUDO EDVLV DFURVV HDFK FXUUHQF\ µ
“At times when sterling is strong you might want a 100% hedge at other times you’ll want to move to zero per cent hedge. You need to catch those 10 per cent PRYHV EXW QRW HYHU\ SHDN RU WURXJK µ VD\V *HUDUG.
Expectations of alpha Indeed it’s worth noting that trying to catch every peak and trough not only brings added risk. “If you update the underlying exposure too frequently you can get churn bringing excessive costs so we suggest applying a balance update on a monthly basis, unless of course you have a material change in underlying FLUFXPVWDQFHV µ H[SODLQV 5D\PHQW
This pure form usually works through each currency pair and its recent performance in the volatile markets of the past two years has been far more SRVLWLYH WKDQ SDVVLYH KHGJHV 2QH TXHVWLRQ WKH consultants ask is whether this brings any alpha to the table or whether this is even desirable in any KHGJLQJ VWUDWHJ\ $UQDXG *HUDUG·V YLHZ LV WKDW even with hedging strategies, especially those called ‘active’, clients do have an expectation of constant alpha. “I don’t think there can be - if the pound was weak over the next three years you can’t guarantee alpha to your unhedged benchmark clients as strict hedging programme won’t allow you to go below the unhedged position.
&RQYHUVHO\ \RXU IXOO\ KHGJHG EHQFKPDUN FOLHQWV shoXOG JHQHUDWH JRRG DOSKD 2YHU WKH F\FOH \RX ought to be able to demonstrate value added as the clients’ benchmark becomes sub-optimal. The key is WR FRQWURO FRVWV GRZQVLGH SURWHFWLRQ GXULQJ SHULRG of low or no opportunity, and to generate gains GXULQJ SHULRG RI KLJK RSSRUWXQLW\ XSVLGH FDSWXUH µ
.RSIHQVWHLQ IHHOV WKDW DOSKD LV IHG WR WKH ERWWRP OLQH E\ UHGXFLQJ ORVVHV DQG FDVK ÁRZ WR PDLQWDLQ SRVLWLRQV “A good currency manager should generate alpha based on what is embedded in the portfolio but some clients still get confused with the difference between ULVN PDQDJHPHQW DQG JHQHUDWLQJ DOSKD µ KH VD\V
%XW EDQJLQJ WKH DOSKD GUXP WRR ORXGO\ LQ WKH hedging world can have other reverberations. As Rayment and Record point out, the alpha strategies that followed between 2004 and 2007 (even within VRPH ¶DFWLYH· KHGJHV ZLWK FDUU\ WUDGHV HQGHG LQ tears. “The story wasn’t too good and the outcome not what the client expected and they didn’t XQGHUVWDQG ZKDW ZDV KDSSHQLQJ µ RXWOLQHV 5D\PHQW
“Lots of clients had a terrible time with that in the end so they are now looking for something else that GRHVQ·W LQYROYH FDUU\ RU D PRUH GLYHUVLÀHG DSSURDFK ZLWK WKLQJV OLNH PRPHQWXP DQG YDOXH µ VD\V 5HFRUG 6R DOO WKHVH LPSOLFDWLRQV KDYH EURXJKW QHZ HOHPHQWV to the active hedging business at least in terms of application, if not origination.
Adding to hedging
programmes A more recent development has been to add to hedging programmes an alpha seeking (absolute UHWXUQ SURJUDPPH DV ZHOO 7KH ODWHU LV QR ORQJHU
Autumn 2011 | Currency Investor 19
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