The steep depreciation of the Australian dollar has forced hedge fund-of-funds Gottex to halve its currency hedging level and freeze redemptions, while some super funds have been forced to seek cash from their funds managers following a sharp rise in the collateral required to roll over hedging contracts.

Many super funds are understood to have been forced to write big cheques to their hedging counterparties to ensure existing hedges remain in place, and several business development managers have complained to I&T News that prospective investments or even commitments have been cancelled as a result.

Several fixed interest managers have reported receiving partial redemption requests from their institutional fund clients for the purpose of rolling over currency forward contracts – presumably the bond managers are being targeted as their portfolios are considered the most liquid of any asset class in the current environment. The $A-denominated Gottex offering, a market neutral hedge fund-of-funds provided by boutique Select Asset Management, halved its currency hedge when a credit line it held with a prime broker that financed the position was closed.

Since its investments are mostly illiquid, Gottex depended on the credit line to keep its currency hedge in place. The steady performance of the market neutral fund has dropped sharply as a result of its exposure to the exchange rate between the $A and the stronger US dollar.

Ratings agency Morningstar downgraded the Select Gottex Market Neutral Fund from ‘highly recommended’ to ‘hold’, while Standard & Poor’s, which had given the product a ‘5 Stars’ rating, placed the fund ‘On-Hold’.

In its report, Morningstar stated the changed currency hedging arrangement introduced the risk of foreign exchange movements and had exacted a “material effect on the risk exposures in this strategy”.

“To rub salt in the wound, Gottex announced on 13 November that it is freezing redemptions indefinitely because of the number of clients headed for the exit.”

I&T News understands that 11 per cent of investors in the Gottex fund applied to redeem their investments when the manager informed clients of the weakened currency hedge.

It is funding the current 50 per cent hedge through redemptions with underlying managers and new applications.

The manager has not indicated when it will be able to restore a full currency hedge, but has told Select that it will suspend redemptions until April next year. While its underlying investment process remains unchanged, the lack of directional exposures and minimal correlation with broader asset classes, two major strengths of the fund, were now adversely influenced by foreign exchange risk, Morningstar stated.

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