Active Strategies - currency hedging that can deliver smarter risk management


restricted to trade versus the client’s base currency and against his existing foreign currency exposures but can enter into cross-trades positions. “These cross-trades positions allow the manager to exploit opportunity more broadly like expanding into HPHUJLQJ PDUNHWV IRU H[DPSOH µ QRWHV *HUDUG


“In the early days and because of the underlying asset structure, strategies had basic limits of being denominated in the four large currencies – sterling, dollars, yen and euro and that leaves you with OLPLWHG VFRSH WR WDNH DFWLRQV LQ RWKHU FXUUHQFLHV µ observes Martini. Now the active element of the strategy can include cross-hedging, giving currency protection with an element of alpha opportunity.


Martini favours the 1RUZHJLDQ .URQH IRU WKH same example, saying it can bring a more active dimension. “What you lose is the close linkage embedded in your assets because your exposure to Norwegian stocks might be very small, but it could be seen that as an alpha JHQHUDWRU µ KH DGGV


How exactly a currency manager might combine these elements is open to house- style and client demands. How much standard deviation for the underlying asset currency benchmark must be decided upon. It may be that half the hedge would be structured as a passive or dynamic hedge, while the other half takes more speculative positions based on the underlying assets.


Emerging markets Another new element has been the rise of the emerging market currencies and the role they now play in these more active hedges. Neil Record says he sees few clients with exposures above 10% of assets in these markets and his view is that their risk should not be hedged, indeed there is an underlying value proposition to view them as appreciating in the mid


20 Currency Investor | Autumn 2011


to long term. Rayment agrees but says the short-term YRODWLOLW\ FDQ SURYLGH DOSKD RSSRUWXQLWLHV *HUDUG ZDUQV KRZHYHU DJDLQVW WKH 86 GROODU ULVN WKDW LV embedded within the emerging market exposures. Although the picture versus sterling is less clear as a result of the sterling depreciation during the credit crisis, there is a case for decomposing the true nature of the emerging currency risk (it is coincidentaly FRQVLVWHQW ZLWK WKH ZD\ (0 LV DOVR RIWHQ WUDGHG ² YLD WKH 86 GROODU


In 1995 emerging economies accounted for 15% of JOREDO *'3 RI JOREDO HTXLWLHV DQG HPHUJLQJ market debt was 1.5% of global debt capitalisation. Today the same economies make up 33% of JOREDO *'3 RI JOREDO HTXLWLHV DQG 3% of global debt capitalisation, according to Martini. “Why is this relevant? Think of it as an investment opportunity - debt and equity instruments are the only products on the public markets. ,I *'3 VKRZV the wealth of the underlying markets, private investment has more opportunity and these assets shows the public market is trailing in


opportunity and you can FDWFK WKDW LQ WKH FXUUHQF\ µ


he argues. ,W LV DOVR D TXHVWLRQ .ORSIHQVWHLQ WKLQNV LV LPSRUWDQW ´(YHQ LI WKH\ WDNH WKLV


YLHZ QRW WR KHGJH EHFDXVH RI HPHUJLQJ PDUNHWV *'3 rising faster than the developed world, they may also take the view that it’s worth removing and exploiting VRPH RI WKHLU LQKHUHQW YRODWLOLW\ µ


What has also added to the emerging markets story is the greater liquidity throughout the sector and a growing acceptance of NDFs, providing lower cost thresholds.


A matter of cost 2I FRXUVH DV IDU DV SRWHQWLDO FOLHQWV DUH FRQFHUQHG the big question in implementing any strategy, is how much will it cost. And this may be the one area


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