Currency managers seek to boost fx hedging gains

* Currency managers see chance to boost fx hedge returns

* FX returns not ‘zero sum game’ for investors

* Low-rate environment may push investors to equities

By Tamawa Desai

LONDON, Oct 25 (BestGrowthStock) – Currency managers overseeing
pension funds and other large institutional investors say they
are pushing for active ways to hedge currencies in a bid to
reduce risk and provide better returns on currencies themselves.

In the current ultra-low interest rate environment,
investors are increasingly turning to riskier assets such as
foreign-denominated equities and currency managers see an
opportunity to increase returns on the currency portion as well.

“It is a myth that currency gains and losses wash out,” said
Colin Crownover, managing director of currency management at
State Street Global Advisors which has $83 billion in assets
under management. “It is not a zero sum game for an investor.”

State Street says its “dynamic strategic hedges” is designed
to reduce currency risk without sacrificing return. Its strategy
has yielded an annual return of 3.06 percent, which has beaten a
2.45 percent return against a zero hedge, or a 1.82 percent
return on a passive hedge of 50 percent.

Most investors employ a passive 50 percent hedge.

The maximum drawdown, or loss, has also been smaller for
dynamic hedging at -6.78 percent versus -13.96 for unhedged
assets and -7.57 for static hedging of 50 percent.

Pro-cyclical currencies such as the Australian dollar also
carry a risk premium, which would also need to be taken into
account when setting hedging ratios, it added.
“We look at generating return depending on how far away a
currency is from fair value based on our purchasing power parity
model,” Crownover said.

Purchasing power parity refers to a theory that estimates
the amount of adjustment needed in an exchange rate in order for
it to be equivalent to each currency’s purchasing power.

APPETITE FOR YIELD

With the U.S. Federal Reserve expected to expand its asset
purchases as early as next week and other major central banks in
no hurry to raise interest rates, prices on equities and
commodities have soared as investors hunt for better returns as
bond yields remain at rock-bottom levels.

“There is a strong appetite for yield but investors can’t
get them through money markets or short-term bonds,” said Pierre
Lequeux, head of currency management at Aviva Investors, the
asset management arm of British insurer Aviva (AV.L: ).

“More pension funds may be taking an aggressive stance
towards equities, which are usually unhedged,” he said.

“We want to be more tactical by reducing risk by providing a
degree of ‘alpha’.”

An alpha product uses manager skill to, in theory, strongly
outperform a given target such as a market benchmark.

Aviva focuses on G10 currencies and is working on a stand-
alone product although no date has been set yet for its release.

Currencies have fluctuated sharply since a global financial
crisis erupted in late 2008, with the dollar moving some 10
percent on either side against the euro in several one-month
periods since that time.
(Editing by Stephen Nisbet)

Currency managers seek to boost fx hedging gains