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Market Volatility Highlights Need for Currency Hedging

Rohanna Wise

Following the recent record-breaking market drop, Reuters published this article related to an increased awareness by fund managers of the importance of effective currency hedging and exposure management. While an afterthought for many, a minority of managers appreciate the alpha generation that can be recognized when managed in an efficient manner. For too long, many managers view currency risk much like they view the weather. They can research and prepare but at the end of the day there is not much they can do about it. I addressed this element of begrudged acceptance in my book, Hedging Wisely :

Investors have all too readily, and for far too long, shared the mentality that currency risk is a built-in reality that simply has to be accepted. Sometimes it plays out in their favor, and sometimes not. Some Investors expect their Managers to have something in place to hedge their currency, but that something is often not well defined, let alone scrutinized or evaluated or compared to alternatives. As long as the box marked currency hedging is checked, a Manager is considered to be qualified. Don’t our Investors deserve better? Shouldn’t the experts actually be qualified? Arguably it’s the Investor’s responsibility for not asking more questions, not examining currency risk more closely, and not expecting more from the Managers than merely check a box. But if I were the Investor (and of course, I am!) I would counter that argument with my own argument that my naivety is why I hired you, the expert. The Investor’s lack of knowledge can’t be penalized or used as an excuse not to do a better job, when that same lack of knowledge is why they employ financial professionals in the first place. They don’t know how to hedge currency risk, and they shouldn’t be expected to or we will all be out of work. That’s why they hire experts. So let’s be those experts”

To be clear, by “expert’, I don’t mean you need to be a Macro-Economist or a Ph.D. in mathematics, or even a currency expert per se. There’s a distinction between currency experts and expert currency hedgers. Our mission at Wise Trading Tech is to empower every investment manager with an intuitive tool to efficiently manage their currency exposure and risk at a justifiable cost.  We believe non-experts shouldn’t need to understand the complexities of currency exposure any more than they understand the complexities of their wifi service. Like transaction costs or exchange fees, currency management is an unavoidable element of the investment process. And like TCA and Best Execution, the costs associated with currency management can be quantified by those managers who are proactive in the process.