A new report from MillTechFX reveals that 75% of UK fund managers are currently hedging their currency risk, with 95% of those who aren’t considering doing so amidst market uncertainty.
The report, entitled ‘MillTechFX UK CFO FX Report 2023: The intensifying challenges for fund managers’, is part of a global research series aiming to shed light on how fund managers worldwide are adapting their FX risk management practices.
Despite a decrease in volatility since late 2022, the proportion of fund managers hedging a significant part of their FX exposure increased from 46% in 2022 to 56% in 2023. The average hedge ratio lies between 40-49%, with 68% of fund managers reporting this as higher compared to last year.
Furthermore, 77% of surveyed fund managers noted that their returns have been impacted by GBP volatility, and 75% believe that the cost of hedging has risen over the past year.
Looking forward, 51% plan to increase their hedge ratio, and 50% are preparing to extend their hedge window over the next year.
The report also highlights several challenges faced by fund managers, including a lack of market transparency, operational difficulties and counterparty risk.
In response to these challenges, 79% of fund managers are exploring new technology platforms to automate their FX operations. Moreover, 56% of larger fund managers require their FX counterparties to have strong ESG credentials, compared to 30% of their smaller peers.
Eric Huttman, CEO at MillTechFX, commented, “Our research shows that fund managers aren’t out of the woods yet when it comes to the threat of currency movements, and the majority are renewing their focus on hedging regardless of whether volatility returns or not. While there will always be some that don’t hedge at all, many are deciding to hedge a higher amount of exposure to protect their returns.”
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