FORUM
How do you view currency investment: as an uncorrelated source of alpha, as a risk mitigation investment (hedging) or as holistic – utilising hedging and alpha mandates?
KR: At APG, currency investment is viewed as holistic, we actively seek attractive currency investments as a source of alpha and hedge a substantial amount of the FX exposure stemming from the countries in which our clients are invested most heavily. In relative terms, the size of APG’s hedging activities dwarfs that of APG’s currency alpha mandates. At present, the EUR-equivalent of the FX-exposures that are being hedged by APG is close to EUR 90 billion and is roughly equal to one third of the average client’s asset base.
NW: For us currencies are not an asset class. Our benchmark currency position, 100% hedged, simply converts all global risk premia that we earn back into our local currency. We choose to have a 100% hedge because we believe there is a systematic return pick up associated with the riskiness of our base currency.
Therefore the benchmark decision is a simple VWDWHPHQW RI RXU LQYHVWPHQW EHOLHIV DQG D UHÁHFWLRQ RI our risk preferences. Currencies can provide scope for
risk and return and the returns associated with the currency hedge at both the benchmark level, and through any active management of the position, are fully attributed in our periodic reporting. The benchmark refers to our Reference Portfolio which is a notional portfolio of inexpensive, listed, growth- weighted passive exposures that we believe would achieve the objective of the Fund. Because we deviate from such exposures to add additional value to the Fund (e.g. with unlisted investments), the performance of the Reference Portfolio is therefore a key benchmark for whether we actually do add value to the Fund. That’s why we refer to the reference portfolio as ‘our benchmark’.
JwvO: With the exception of emerging markets currencies, all currency risk is fully hedged for the investments in the strategic benchmark. Currency exposure in reserve-currencies is added via an overlay account. The expected impact in risk and return is at least monitored at an annual basis. When implementing the currency hedge, our traders have a Var-limit to reduce the risks of implementing. EM- returns are periodically compared with local returns, but due to a lack of data a comparison with hedged returns isn’t possible.
“At APG, currency investment is
viewed as holistic, we actively seek
attractive currency investments as a
source of alpha and hedge a substantial amount of the FX exposure stemming from the countries
in which our clients are invested most heavily.”
KLAAS REEDIJK
Autumn 2011 | Currency Investor 53
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