North American fund managers are increasingly concerned about rising foreign exchange (FX) volatility, driven by the stronger US dollar and uncertainty surrounding the upcoming US election.
In response, many are extending their hedge tenors and increasing their hedge ratios to better protect against potential risks. Additionally, the push towards automation in FX processes is gaining momentum, though a significant number of firms still rely on manual methods.
These findings come from the MillTechFX North American Fund Manager CFO FX Report 2024, which provides insights into how fund managers are adapting to an increasingly unpredictable market environment.
MillTechFX surveyed 250 senior finance decision-makers at North American fund managers to reveal their FX challenges, hedging strategies, their drive towards automation and how they plan on managing currency risk around the upcoming US election.
Sixty-five per cent plan on increasing their hedge tenor, extending the period during which they are protected from volatility and 34 per cent intend to increase their hedge ratio, protecting a larger part of their exposure and business from volatility.
Stronger dollar
The report reveals that North American fund managers are struggling with the impact of a stronger dollar, with 83 per cent reporting reduced returns and 81 per cent experiencing increased operational costs. Concerns about foreign market exposure are widespread, with nearly all respondents worried about the dollar’s strength.
In response, fund managers are adopting more robust hedging strategies. The proportion hedging currency risk has risen to 79 per cent, with an increase in both the average hedge ratio and tenor. Despite higher hedging costs, managers are seeking greater protection.
The report also notes a strong push towards automation, though many still rely on manual processes. As managers prepare for T+1 settlement, they are increasing staff, improving communications, and upgrading IT systems, which has led to higher operational costs. Key challenges include cost calculation, onboarding liquidity providers, and managing FX counterparty credit.
“It’s a fascinating time in the FX market in North America with the greenback strengthening despite analysts predicting its value would drop in 2024 coupled with a highly charged US presidential election campaign which will likely move markets,” commented Eric Huttman, CEO of MillTechFX.
“Overall, as we navigate through challenging market conditions and pivotal political events, a diligent and forward-thinking approach to FX hedging will be crucial for protecting returns and achieving sustainable success.”
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