Subscribe to our Newsletter

Can Currency Hedging Impact Returns?

Rohanna Wise

Are Your Returns in the Same Currency as all Your Clients’?

In a recent article on Bloomberg.com, Liz McCormick leverages an example of how the Nikkei 225 stock average to portray how returns can be impacted by converting the returns to USD and the Euro. The index, which was up 16.7% in dollar converted terms, would have a return of 13.5% to those in yen, but only 8.6% in Euro, due to the appreciation of the Euro against the yen.

..That Can Make the Difference Between A Good and Bad Year

As you can see from this example, the difference between beating market average returns and under or overperforming can be driven by the ‘home’ currency’s changes versus the denomination of the investment. As an asset manager, you can get a lot of factors right, but near-term moves in currency may mean that hedging can ensure that the resulting gains remain gains. While lack of currency management can also result in unexpected gains, this is not typically a risk that is desired by money managers or their customers as part of their strategies unless explicitly sold that way.

Max Kettner comments in this and other articles about the excitement about the strength of the euro in 2017 and the potential expectations about 2018. There are risks when a currency strengthens, besides outsized expectations, like the one above – a dampening of international fund returns.

Outsourcing That Risk Has Become Its Own Problem

So what are asset managers to do? Faced with the potential to outsource this risk, some managers have turned to sell-side banks. However, as we noted in our recent blog about lawsuits in the industry, the tide of sell-side banks being penalized for cheating the buy-side continue. By recent example, Credit Suisse will have to pay $135 million to settle the New York Fx investigation.

We Are Here to Help

At Wise Trading Technologies, we believe cost-effective tools to manage currency risk and gain transparency into potential areas of exposure are a must for the industry. Our WiseRisk product was designed with all of these market dynamics in mind, helping asset managers who want to manage currency risk avoid the pitfalls of outsourcing. For more information, contact us at info@wisetradingtech.com.