Currency management part two – In a portfolio context

Lorne Gavsie's picture

Developing currency management strategies, and executing on them, is an integrated and multipart process. Market positioning, capital flows, interest rates, geopolitical risks, economic fundamentals, technical analysis (and the list goes on), collectively contribute to currency direction. Experienced currency managers tend to increase their currency positioning (or hedge) when their views (or concerns) are strongest, and trim-back when the view has played out, or are proven wrong. Conversely, when pulling back the throttle, the safe-zone should be well defined – what is the most effective neutral position for a currency hedge in a given portfolio? 

Determining the appropriate neutral level for an investment portfolio is critical. Signature’s internal process considers factors such as the underlying asset mix, its behavioral relationship to the portfolio’s currencies and base currency, investor expectations, investment mandate, the appropriate balance of price stability vs. returns, among others. This qualitative and quantitative analysis determines a suitable neutral hedging level. A directional currency view has not been considered at this point. Rather, it has provided an objective basis and hedge ratio as a starting point for active currency hedging. 

A neutral hedge rate may range from 0-100% and often resides near 50%, providing flexibility and protection from a rising or declining currency. The next question is how far from neutral should your currency hedging positioning be allowed to move. If 50% hedge ratio is neutral, the analysis described above should also determine the outer limits appropriate for each portfolio (i.e. 30-70% hedged or 0-100%).

Once the framework is in place the currency view should come into play. This is where methodology, experience and knowledge differentiate foreign exchange overlay managers, and how active currency hedge management differs from static, predetermined passive hedging mandates.

Signature manages currency exposure

As a Canadian-based global asset manager, Signature has been actively managing its foreign exposure for more than a decade and continues to invest, build and expand its currency trading and investment capabilities. Currency hedging remains a key element in managing risk and protecting the global investment returns.

Comments

Submitted by Jim Durnin on

Thanks for your comments. So what is the policy and parameters for the Signature Global and Canadian funds?

Please let me know.
Jim Durnin

Lorne Gavsie's picture
Submitted by Lorne Gavsie on

Hi Jim, thank you for taking the time to read the FX blog and for your inquiry. 

As you would expect, the domestic-oriented Signature Canadian fund has a different neutral FX hedge target (policy) compared to the Signature global fund.  As outlined in the blog, many things are taken into account to arrive at the appropriate neutral hedge targets for our funds such as investor expectations, asset correlations, etc.  The neutral hedge ratio is not static and may change over time as underlying factors like cross asset class correlations change.

The Signature Canadian fund currently has a 50% neutral anchor.  While we actively manage the hedge level around that 50% policy target, it would take exceptionally high conviction to see our hedges reach the extremes of the allowable parameters (0-100%).  Conversely, the Signature global fund is set with a 0% neutral hedge target (again, based on the outcome of our quantitative and qualitative assessment).  Hedges for this fund are implemented as we develop a view on a particular currency exposure within the fund, and will rise and fall based on the conviction of our view.  Similar to the Canadian equity fund, it would take an extremely high degree of confidence to take the hedge for any currency all the way up to 100%. We typically adjust our hedge positions in small, measured increments.    

 

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We welcome your comments and questions for the Signature team and will respond as soon as possible. Please note that all comments are reviewed for their relevance to the topics discussed in the blog, and that comments may be edited.

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