Currency hedging strategies are the unsung heroes of portfolio management. The importance of currency hedging is linked to the changing investment landscape. We have three key reasons why currency hedging tools are important. What are yours?
The globalization of business and markets is contributing to an increased allocation to international stocks in the portfolio, driving increasing currency risks. While investors may be eager to diversify their investments, they may not want to increase the overall risk of their portfolio, and as a result demand for currency-hedged funds by investors has been increasing. Hedging offers the opportunity to take advantage of these markets without having to accept the currency losses.
2. Political Uncertainty
The panic that occurred as a result of Brexit wiped $2 trillion off market values worldwide. It triggered one of the most volatile trading sessions in history. The British pound suffered its biggest one-day selloff. Sterling suffered a plunge in London, from $1.50 against US dollar to just $1.368 in a day. Drastic swings happen from time to time in history due to politics, but are challenging to predict, or come entirely as surprises due to the somewhat personal nature of the events.
When investors place capital with a fund, they expect that fund managers have protection from this type of event managed. But the magnitude of swings in portfolios in response to these events indicate they were exposed.
3. Economic Uncertainty
“In an economy where the only certainty is uncertainty, the one sure source of lasting competitive advantage is knowledge.” – Jkujiro Nonaka
Macroeconomic conditions also generate unpredictable market events. The fall in price of oil (crude oil being major export of Russia) in 2014 declined the economic activities in Russia, causing the collapse of the Russian ruble and decline in Russian economy. Chinese stock market turbulence that started on June 2015, caused investor uncertainty across globe and destabilized stock markets in New York and Europe.
Volatility witnessed across global stock markets in the last several years can in part be attributed to crises involving Greece, EU and IMF. Precise visibility into where your currency exposure is, and how much of it is hedged, is critical to protecting your returns from these types of events.
How Can Technology Help
With all so much vulnerability to unpredictable global events, currency hedging has never been more important. Most investment systems have at least limited toolkits to manage currency positions, but a precise snapshot of currency exposure, and how much if it is hedged is not available to most.
The need for improved protection is growing faster than any order management system can deliver new functionality. The problem is that the urgency of fixing this problem competes in the same feature pipeline as the rest of the OMS’ functionality.
That Is Where WISERISK Comes In
WISERISK is a low cost, turnkey solution that plugs into your existing investment application ecosystem to automate and optimize currency risk management. Our advanced system integration platform means implementation takes days, not months.
In addition, WISERISK’s sole purpose is to manage currency risk, so we present features that are not going to be available with your OMS package in the foreseeable future. Features include real-time reporting of currency exposure, automated fund/hedge and close/roll, scheduled rebalancing, monitoring of market conditions for early detection of extreme events, and optimized netting to internalize as much of your FX flow as possible.
We are happy, as always, to discuss this with you and deliver on our commitment to fast, outside the OMS box implementation.