The plummeting Australian dollar and lack of liquidity in underlying funds forced Warakirri’s International Hedged Equity Fund, a hedge fund-of-funds sub-advised by Chicago’s Mesirow Advanced Strategies, to be without a currency hedge for a fortnight last month.
It is understood Mesirow was able to fund a new hedge back to Australian dollars some time in the week commencing October 27, about two weeks after it was unable to find enough cash for the ‘pay-away’ at the conclusion of its previous currency forward contract (thought to have been a three-month forward struck when the spot price of Australian dollars was around US90 cents).
The chief investment officer at one super fund client of the hedge fund-of-funds said there was a "moral" issue in the Warakirri product briefly breaching its offering documents, but that "ultimately" there had been little impact on returns. It is not known what measures Mesirow took to raise the cash required to roll over the currency hedge.
The managing director of Warakirri, Ian Rohde, said yesterday that all the manager’s products offered with a currency hedge were hedged. He would not comment on the hedging problem experienced with Warakirri’s International Hedged Equity Fund, however he said maintaining currency hedges had become an expensive challenge for the entire industry.
Rohde said he had heard of one infrastructure manager asking its clients for emergency cash to roll over a hedge, and a global bond manager openly asking its clients whether they’d prefer the "gamble" of going unhedged, rather than the prospect of selling assets into depressed markets to roll over a contract.
Rohde said the liquidity crunch and precipitous fall in the Australian dollar would usher in a new approach to currency hedging.
"I think in future we’ll see currency hedging that takes place within a product replaced by funds running a currency overlay program. Counterparties will find it easier to deal with funds that have the liquid assets, the custodial relationships in place…if a super fund has to meet a margin call it’s a lot easier for them to sell some large cap Australian equities than it it is for managers in many asset classes."
JANA Investment Advisers, which had several clients invested in the affected Warakirri fund, was working with its clients to review approaches to currency hedging, according to chief executive Ian Patrick.
JANA was recommending that with the Australian dollar trading in the US60 cents range, clients who were below their neutral hedging level should return to that level.
He said it was "illogical" not to hedge the low-volatility, high-income asset classes of fixed interest and infrastructure, but beyond these said that currency exposure should be looked at in terms of a client’s "overall exposure".