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.