GLOBAL - ABP, the €209bn pension fund for Dutch civil servants, has a strategic hedge of a 100% for all of its US dollar exposure based on its ALM study (amended version of earlier story).
Speaking at a conference in Frankfurt, Jos Lemmens, senior portfolio manager of the GTAA Fund at ABP, pointed out that the optimal hedge appeared to depend on the investment horizon.
But for various practical reasons, ABP can deviate from this ALM position and has done so in the past.
Based on medium term views, ABP will tactically deviate from the strategic hedge, which is done through the Global Tactical Asset Allocation(GTAA) fund. It is possible that this can result in over 100% being hedged at any particular moment.
ABP has 42% of its investments denominated in US dollars, with an equal proportion also denominated in euros, Lemmens said.
While the remaining currencies are not hedged strategically on the basis of the ALM study, the asset managers can hedge their active positions, where these deviate from the benchmark weights. But for ABP's in-house managers hedging does depend on the specific currencies involved.
Lemmens said than since 2001 ABP had created two special currency only in-house managed portfolios to generate additional alpha, though theses are not the only in-house managed portfolios within the GTAA fund that can have currency positions.
He presented a table showing ABP's returns from 1994 to the third quarter of 2005 regarding currency management. "What the table reveals is that average hedged and unhedged returns are almost identical, while hedging decreases volatility by 0.7%," he said.
This result relates to the strategic hedge position only and confirms the view that currency as a strategic asset class only adds volatility, without a long-term expected return.
"Currency is in our view an ideal vehicle to add alpha," Lemmens said.