As super funds grow, their demand for speciality currency exchange services has increased due to new regulation around disclosure of costs.

“In the last 12 months, we have on board three new super funds, each one of those has hired Mesirow to do the passive risk management, and also that foreign exchange execution capability, and the driver for that is RG 97 (ASIC regulations for disclosure of costs),’’ said Mesirow Currency Management chief executive Joe Hoffman. The Chicago-based currency management firm provides services to 11 Australian super funds.

HESTA head of portfolio management Jeff Brunton said the super fund outsourced a range of managers including Russell Investments, Insight Investments and Adrian Lee & Partners for active and passive currency risk management and foreign exchange transactions.

“Outsourcing the execution of our FX management allows us to leverage off the global trading desks these partners operate while retaining control of the positions they enter on our behalf,’’ Brunton said.

HESTA had made recent changes to its currency management approach to improve diversification and better manage emerging market currency risk in the portfolio. “These changes were made as a result of our regular scenario analysis work as market volatility rose over recent months,’’ he said.

“As the outlook for future direction of inflation and interest rates has become less certain, we continue to manage our hedge ratio targets within tight bands.”

Cost savings

The cost savings involved can be significant, estimated to be between 10 and 15 basis points on certain transactions which can be millions of dollars.

“It can be significant savings at the end of the day and every basis point counts, especially when the equity markets are down and people are looking to try to save as much as possible,” Hoffman said. “I’ve seen higher costs in the past where clients have not used a fiduciary or an agent on their behalf.”

This may be due to an infrastructure deal, or even for underlying equity or asset managers where they have to execute FX trades to facilitate the settlement of a securities transaction, he said.

Meanwhile, passive currency risk management continued as the main method of reducing risk on base currency movements against other currencies with Australian super funds exploring option-based risk management above asset-based strategies, Hoffman said.

“We have US$125 billion of assets under management, half of which are in Australia with about US$13 billion in dynamic or active hedging – so the majority of the remaining is passive,’’ he said.

“Every client is a little bit different, they have different requirements…different liquidity, constraints or requirements. So we work with each of these clients to help them manage their currency risk according to their requirements.

“Some clients want to hedge currencies at the asset class level, some clients want it done at the option level. I will say there tends to be more of a trend to people migrating to hedging at the option level, though more recently passive hedging. ”

Hoffman said passive management was “very rules based” with many moving parts including changing daily market values, investments and redemptions of underlying investments which are taken into account with the grand scheme of each overlay.

Mesirow peer BNY Mellon Investment Management defines currency risk management strategies as beneficial when they systematically adjust hedge ratios in periods where the investors base currency rises and falls considerably over a short period.

In reducing risk, a good currency management strategy can also generate return.

“To manage currency risk, investors must decide on three things: the strategic hedge ratio (a passive approach), if and how to deviate from the strategic hedge ratio (a dynamic approach), and what to do for emerging market currencies, which are typically more volatile than their developed market counterparts,’’ BNY’s Insight Investment team said.

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