From time to time, we like to share articles of interest from the many we see. We hope this is helpful to you in finding recent standout issues and thinking on currency hedging.
Have a great August, we’ll keep our eyes and ears open for news of interest. Please check our twitter feed @wise_risk for more market intel and thinking.
At Wise Trading Technologies, we want asset managers to be able to implement their own effective currency hedging strategy; all those involved in investment will be able to participate in global markets regardless of their level of currency expertise.
When investors participate in global markets, they take on exposure to currency markets. When an investor has investments and clients in multiple currencies, maintaining an accurate hedge can be extremely difficult with much to juggle. Hedging Wisely: A Non-Expert’s Guide to Expertly Hedging Currency Risk serves as a guide to how to choose, implement, and maintain a hedging strategy. Hedging Wisely examines issues such as an increasing interest in the impact of currency, the effect of currency on investors’ portfolios, the consequences of devaluation in China, negative interest rates, and interest in emerging markets.
Wise Trading Technologies CEO and Author Rohanna Wise has been working in trading technology and automation for the last 20 years, and is the founder and CEO of Wise Trading Technologies. Rohanna will present hedging strategies which the reader can easily use to protect themselves from risk when investing in global currency markets.
No one can predict with certainty what will happen in the currency markets but there are some clear indications that foreign exchange markets will continue to evolve through regulatory changes, shifts in liquidity providers, and technology innovations. While we mentioned about the political uncertainties in our previous blogs that jolted the foreign exchange markets around the world, uncertainty around a stronger U.S. dollar and higher interest rates could drive more volatility in near future. Ivy Schmerken, in her blog talks about the trends in the currency markets.
- Ivy states that regulations such as Basel II and Dodd Frank’s Volcker Rule have made it difficult for banks to warehouse risk and have reduced capacity of the banks to compete. And because of the macro events like when the Swiss National Bank unpegged Swiss Franc, sending shockwaves through the prime brokerage community, Prime brokers raised fees on the hedge funds and dropped clients, which in turn may have contributed to the downsizing of the global FX volumes – Between 2013 and 2016, FX spot trading activity reduced from $580 billion to $390 billion according to Bank for International Statements.
- Speed-based trading strategies may become less important to currency markets. Certain algorithmic strategies primarily based on speed have reached a saturation point and as these trends evolve we could see a shift from aggressive latency-driven strategies to more passive strategies based on electronic market making.
- Blockchain is believed to have a big impact on delivering real time clearance and settlement in currencies. This could help to speed up transactions, assess risks quicker, and cut costs as well as replace legacy infrastructure.
- Finally, the technologies such as big data analytics, algorithms, and machine learning can potentially be integrate to make trading decisions. For now, the buy-side firms are looking for technologies that will help reduce workflow of asset managers on routine areas. And hence, enabling them to focus on more complex trades.
Enabling asset managers to focus on the important trade is the philosophy that we live by at Wise Trading Technologies and you can witness the same through our products. And our first product, 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. 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 had a terrific and informative webinar with our advisor and ‘Master of Trading’ John Dacosta.
To receive information about future webinars, join the WiseRisk Community here.
Been to the Museum of American Finance? Read a biography of a financial services CEO? Curious how Boston became a center of asset management? This webinar is for you.
Calling all financial services enthusiasts – if capital markets get you going in the morning, come hear exciting stories and experiences that made our trading systems what they are today.
What: Fireside Chat and Q&A with Master of Trading, John DaCosta
Where: Webinar location will be emailed when you sign up here
When: May 11th, 1pm EST
What You Will Learn
Once upon a time at Wellington, it was early days and technology looked nothing like it does today. Come listen to the fascinating story of how trading systems have evolved to how we know them today.
It’s critical to understand the past in order to plan for the future.
About John DaCosta
John recently retired from his position as Senior Managing Director of Global Fixed Income Trading for the Wellington Management Company. At Wellington, John oversaw the firm’s interest rate, currency and emerging markets trading both in Boston and London. His responsibilities included workflow design, trading implementation, creating and implementing compliance and regulatory protocols. John was the visionary behind the currency and derivatives infrastructure at Wellington, one of the largest asset managers in the world. His knowledge and expertise allowed Wellington to efficiently trade trillions of dollars of currency and derivatives on a yearly basis. He sat on many committees at the firm, including the Dodd-Frank implementation group and the Counter-party Review Group. He has over 25 years of trading experience.
At WISERISK, we are trying to help fix the urgent issues that financial institutions have around their legacy systems and large, tough-to-replace platforms. We know large institutions are challenged by legacy systems and lack of competition amongst providers. This is why we found a recent blog by Chris Skinner so hard to ignore. The blog is based on this article by Anna Irrera.
The blog cites some statistics which will probably resonate with you, too.
In addition, the dependence on COBOLx is a problem not unlike floating on a melting patch of ice in the middle of the ocean as programmers who know the legacy languages of these systems are aging.
Now, we are a ‘mature’ team and might take exception to being called ‘aging’ at the tender age of 45. But the aging of the systems is directly correlated to the age of the programmers, and it’s an indicator of the broader challenge.
Follow our blog to find out more about how we plan to address this challenge with our cloud-based, non-integrated currency hedging and other systems software in the coming weeks!
At WISERISK, we are always on the lookout for articles relevant to the changing nature of the currency markets, particularly on the implications of hedging currency risk. A brief roundup of news articles show how the importance of hedging foreign exchange exposure is in the forefront – there were many on this topic of late.
Let us know your opinion – what do you think about the customer imperative to implement currency hedging? Email us at email@example.com.
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.
Why wouldn’t you want a new OMS? Let’s just say we’ve been there at WISERISK. Here are just a few reasons we’ve heard that folks avoid making the switch:
“Vendor selection can get political.”
“It’s like a 3 year root canal.”
“My budget is too limited next year to have that magnitude of change.”
But for those of us concerned with hedging currency risk, this can create problems:
- Sometimes new tools become available elsewhere, but we can’t justify a new platform for the reasons above.
- Our current OMS provider is great, but currency features are far behind in the queue.
- Sometimes there is no option available. A snapshot of exposure is a great company risk tool, but no current OMS provider has or plans to add what is needed.
So We Are Trapped With Our Current Spreadsheets And Post It Note Processes For The Duration Or Are We
Thanks to new cloud-based platforms and the lowered cost of developing new technologies, it is becoming easier to keep your current OMS, and yet still access tools developed just for currency management and hedging currency risk. This is where WISERISK comes in.
At WISERISK, we know these problems well, because we’ve been sitting in your seats for the better part of our careers. We have designed a set of tools that can be used with your current OMS. Even better, we understand how you need to budget and have come up with novel pricing plan structures to make ourselves the best fit possible.
Please contact us with any thoughts and questions.
In the early 1990s, investors began hedging currency risk in order to protect their international portfolios from unpredictable currency fluctuations. The practice was not widely adopted because of the expense and complexity of implementing hedging strategies. From 2000 to 2008, many managers didn’t hedge, yet earned better returns since the dollar was falling ‐ bringing natural currency-derived returns. However, post‐2008, investors from the US have started losing as the dollar has strengthened, and in an environment of low returns, protecting those returns takes on new importance and hedging can make a big difference.
Insurance Is Not Appreciated Until You Need It
As recently as 2010, experts were still debating about whether implementing systematic currency exposure management programs were worth the cost. For a long time, such programs applied to a global portfolio provided modest risk-reduction benefits and statistically insignificant risk-adjusted returns. Now, more asset managers recognize the benefits of implementing finely calibrated strategies to manage the risk and return exposure of currency with more precision than they had in the past.
The Need For Currency Hedging Is Here To Stay
Demand for internationally diversified portfolios has been and continues to be on the rise. More and more investors want to participate in global investment strategies. Currency hedged ETFs, which were non-existent prior to 2010, now hold more than $50B. Our research indicates that approximately 50% of the global $70T AUM is held in foreign assets. Currency hedging systems and operations have become a necessity. The belief that implementing a currency hedging strategy is expensive is outdated. Market liquidity and sophisticated technology have brought the cost of hedging currency risk down significantly. Technology is enabling managers to hedge in real-time and protect returns by eliminating unwanted currency risk.
Enter Wise Em Risk Em
At WISERISK, we believe that Investment Managers should be equipped with the best available tools that can be used to protect and grow their clients’ assets. For too long, protection from increasingly extreme and unpredictable currency market conditions has only been available to a very small portion of investors. We are here to change that by bringing to market a robust, comprehensive, easy to integrate and use, low cost Currency Exposure Management Platform—WISERISK.