An AMP Capital hedge fund-of-fund (HFoF) has become the latest Australian-domiciled hedge fund to see its currency hedging capability diminished due to the dramatic fall of the Australian dollar.

Formerly fully hedged, the AMP Capital Total Return Fund resorted to operating with either a partial currency hedge or no hedge at all last month as the capital required to bankroll a full currency hedge increased substantially as the Australian dollar fell.

Rather than liquidate assets, tap cash holdings or take on more debt to satisfy the increased capital requirements for such a position, the manager chose to remain fully invested.

“Capital is not a problem,” David Dix, senior investment specialist with AMP Capital, said.

The move prompted Standard & Poor’s Fund Services to change its rating of the fund from ‘3 Stars’ to ‘On Hold’ as it is yet to meet the manager “to understand the full extent of this policy change, and its proposed implementation,” Simon Scott, S&P Fund Services analyst, said in a statement.

He said S&P needed to become convinced that the manger had the required skill and experience to execute the new hedging positions while managing the leverage offered to investors in the vehicle, which can be as high a three-times the invested capital.

“The risk profile of the product… may include elements not previously expected by investors,” Scott said.

AMP Capital issued revised product disclosure statements to formally announce the new hedging positions.

Dix said that since most of the underlying managers are US dollar-denominated funds investing in international markets and currencies, the portfolio was “positively exposed” to the falling Australian dollar as the value of offshore assets increased when converted into the domestic currency.

But these gains would be eroded if the Australian dollar rallied. Dix said the manager had an options strategy in place to mitigate the impact of such an event.

He said the fund aimed to reinstate a full currency hedge.

Meanwhile, citing an improvement in liquidity, the Gottex market neutral HFoF reinstated its currency hedging program for non-US dollar-denominated funds after reducing it by 70 per cent last month after a funding line with a broker that kept the hedge in place was closed.

In a letter to investors, Gottex stated that approximately 100 per cent of the aggregate value of non-US dollar share classes would be hedged by monthly rolling forward foreign exchange contracts.

The fund is offered in Australia through alternatives boutique Select Asset Management.

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