A co-founder of Pareto Partners has criticised the currency strategy most common among Australian super funds, describing the 50 per cent passive hedge as “a position of guaranteed regret”, while unveiling an Ambassador-distributed boutique which aims to make money during the 85 per cent of times that major currencies are non-trending.
Ron Leisching formed Mountain Pacific Group to employ a different approach to currency hedging, which he said improved on that which he helped develop at Pareto Partners, one of Australia’s most popular active currency overlay managers. Some of Leisching’s Pareto colleagues accompanied himt to the Seattle-based Mountain Pacific Group, which uses quantitative techniquue to manage not only currency, but commodities and a top-down approach to emerging market equities too.
“In order to add value, active currency management must be as unconstrained as possible, within the hedging objective,” Leisching said during a visit to Australia last week. “It must be able to trade counter to short run moves. It has to trade with higher frequency and has to have anticipative, rather than reactive, risk estimation.”
When Australian super funds were forced to write million or even billion-dollar cheques to roll their currency hedging contracts while the $A fell precipitously in late 2008, it was a demonstration of the perils of passively managing an asset class for which risk is never constant, Leisching said.
“Currency is the one risk that a fund cannot choose to have. Either the fund has foreign currency risk, or it has domestic currency risk..There is no ‘riskless’ currency policy position. “
Australian funds are beginning to agree, with National Australia Bank’s latest biennial survey on currency hedging policy finding 56 per cent of funds had changed their approach in the last two years.
Leisching said a more dynamic approach to currency hedging was prescient as today’s ‘developed’ markets continued to cede economic power to the emerging markets.
“The similarity to our prior work [at Pareto] is in exploiting skew in currency returns, rather than trying to time currency market returns. Our new approach does not act in a reactive way to reduce risk simply in hedging; prospective skew is identified to add value,” he said.