The report also spotlighted several challenges beleaguering the fund managers in the FX market. A conspicuous lack of transparency was cited by 73% of respondents, with cost calculation (33%) emerging as the predominant challenge. Operational hurdles also pervade the FX operations, with manual processes (39%) topping the list, followed closely by onboarding liquidity providers (35%), obtaining comparative quotes (35%), and demonstrating best execution (33%).
The volatility in the foreign exchange (FX) market, albeit reduced, continues to cast a shadow on the investment landscape, compelling fund managers to heighten their risk management strategies.
According to a recent report by MillTechFX, an FX-as-a-Service pioneer, 75% of UK-based fund managers are now hedging their currency risk, a reflection of the shifting approaches toward FX risk management amidst market uncertainties.
The report, titled ‘MillTechFX UK CFO FX Report 2023: The intensifying challenges for fund managers’, uncovers the adaptation of risk mitigation measures across the board.
Uptick from 46% in 2022
Despite the ebb in market volatility since its zenith in late 2022, a larger share of fund managers are now hedging a significant portion of their FX exposure, an uptick from 46% in 2022 to 56% in 2023. The average hedge ratio hovered between 40-49%, with a whopping 68% of fund managers acknowledging an increase compared to the previous year.
The tentacles of currency movements continue to ensnare the returns of fund managers, with 77% affirming the adverse impact of GBP volatility on their returns. The cost of hedging, as perceived by three-quarters of the respondents, has ascended over the last year, an expression of the evolving cost dynamics in the face of persistent market fluctuations.
As fund managers gird their loins for the unfolding market scenario, over half (51%) are planning to augment their hedge ratio, with an equal proportion intending to extend their hedge window in the coming 12 months. This forward-looking risk management posture underscores the enduring priority accorded to FX hedging amidst a relatively calmer market environment.
Challenges for fund managers in FX market
The report also spotlighted several challenges beleaguering the fund managers in the FX market. A conspicuous lack of transparency was cited by 73% of respondents, with cost calculation (33%) emerging as the predominant challenge. Operational hurdles also pervade the FX operations, with manual processes (39%) topping the list, followed closely by onboarding liquidity providers (35%), obtaining comparative quotes (35%), and demonstrating best execution (33%).
In the wake of recent crises at notable financial institutions, counterparty risk has catapulted to the forefront, prompting 80% of fund managers to contemplate diversifying their FX counterparties. Concurrently, 75% are regularly monitoring the credit ratings of their FX counterparties, an attempt to insulate their operations from potential credit risks.
The allure of automation is gaining traction among fund managers, with 79% exploring new technology platforms to digitize their FX operations. The chief drivers behind this automation drive are improved returns and operational risk reduction, each cited by 31% of the respondents.
Environmental, Social, and Governance (ESG) considerations are also making headway, especially among larger firms. A notable 56% of larger fund managers necessitate strong ESG credentials from their FX counterparties, a stark contrast to just 30% among their smaller counterparts.
Eric Huttman, CEO at MillTechFX, elucidated the findings, emphasizing the sustained focus on hedging in spite of the ebbing volatility. The inertia of manual processes in FX transactions, as highlighted by many fund managers, underscores the inefficiency and resource-drain inherent in traditional operational models. The pivot toward digitization, as posited by Huttman, heralds a paradigm shift capable of fostering centralized price discovery, streamlined workflows, enhanced transparency, and expedited onboarding, ultimately propelling operational efficiency and clarity in FX costs.
MillTechFX, stationed at the heart of the global FX hub in London, is at the vanguard of automating the FX workflow, offering an end-to-end solution that encapsulates transparent best execution while trimming both time and costs for its clientele. Through its marketplace, clients can tap into preferential FX rates and credit terms from up to 15 Tier 1 counterparty banks, a conduit to better pricing and credit conditions in the FX market.
The narrative of FX risk management is evolving, underscored by the increasing predilection for hedging, the quest for operational efficiency through automation, and the burgeoning emphasis on ESG considerations. As fund managers navigate the flux of market conditions, the strategies and tools adopted today could well delineate the trajectory of risk management and operational efficiency in the foreseeable future.
