A recent report from FX-as-a-Service company MillTechFX has highlighted significant challenges faced by European fund managers in the foreign exchange (FX) market.
According to the ‘European Fund Manager CFO FX Report 2024,’ 82% of these managers are experiencing a lack of transparency in the FX market. This figure is notably higher than the 73% reported by their UK counterparts.
The study indicates that this transparency issue, primarily linked to difficulties in comparing market quotes, is accompanied by a global rise in FX hedging costs. This cost increase affects 84% of European, 75% of UK and 71% of North American fund managers.
Despite a reduction in FX volatility since the end of 2022, the report shows that European fund managers are still significantly impacted by EUR volatility, with many indicating that FX movements are affecting their returns.
In response, a large proportion of fund managers are turning to hedging strategies to mitigate these challenges. The report notes that 77% are hedging their forecastable currency risk, and others are considering adopting such strategies. The average hedge ratio among European fund managers is between 40-49%, with a majority reporting an increase in their hedge ratio compared to the previous year.
The research also explores the trend towards counterparty diversity, especially in Europe, where 90% of fund managers are seeking to diversify their FX counterparties. This trend is likely influenced by recent disruptions in the banking sector. The report also highlights the significant role of ESG criteria in counterparty selection across various regions.
Additionally, the study points to the reliance on manual processes in FX transactions among European fund managers. Many are using email and phone calls for financial transactions, leading to a notable portion of their workweek dedicated to FX-related activities. This has spurred an interest in automation solutions, with a higher percentage of European fund managers exploring this option compared to their UK and North American counterparts.
Eric Huttman, CEO at MillTechFX, commented: “Despite being one of the largest markets in the world, the FX market is also one of the most opaque. Fund managers across the globe come up against hidden costs and usually only work with a small number of counterparties due to operational complexities, meaning they’re often left in the dark about whether they get a good deal or not.
“Despite volatility calming and the increasing price of hedging, it’s clear FX is impacting European fund managers’ returns and, as a result, they are prioritising FX risk management. In the past year, the majority have increased their hedge ratio to protect their returns while lengthening their hedge lengths, most likely to give them more certainty.
“Many European fund managers are still reliant on manual processes to transact in FX, which is wasting time and resources. The majority are turning to automation brings major benefits, including centralised price discovery, creating an end-to-end workflow, heightened transparency and faster onboarding – all of which can provide fund managers with a clearer view of their FX costs as well as greater operational efficiency.”
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