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The financial year just gone has been challenging for super funds in so many ways, none more so than in the management of their currency expo­sures. In one month alone, last October, two weeks of manic volatility left the Aussie dollar reeling with a drop of US20c. Many super funds had to write very large cheques to cover their cur­rency hedges. With the A$ back up over US80c, the chances of a similar slump up ahead are not being discounted by market observers.

According to Steve Lambert, a managing director and global head of distribution for National Australia Bank, super funds tend to be more prepared to wear short-term volatil­ity than the corporates and managers who participate in the foreign exchange market, however, they are still reactive in changing benchmarks. “There’s a continuing debate as to whether currencies are a separate asset class, however we have probably moved on a bit from that,” he said.

“There is now a greater awareness about the value of having the systematic management of currency, whether this is outsourced or not and whether it is active or a passive overlay.” NAB is hosting a one-day confer­ence in Melbourne on August 27 for super funds and managers looking at various aspects of currency manage­ment, including the big questions of whether to hedge or not to hedge and, if so, by how much. NAB conducts a bi-annual survey, the results of which will be analysed at the conference, which shows aggregate hedging policies of super funds and other institutional investors.

The most common hedge ratio traditionally has been about 50 per cent, but this figure rose slightly in the past 12 months. The main result from the 2009 survey, published late last month, is a big increase in concern about the cash impact of hedging. This is because of the experience in 2008 when funds had realised gains and losses on their hedging instruments at the same time as having unrealised gains and losses on their underlying investments. When super funds were asked in the 2007 survey what would provoke a change in their currency benchmark only 13 per cent responded with ‘con­cern about the cash impact of hedging’.

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