Three-quarters of respondents to this month's Off The Record survey used currency management, 91.5% of these doing so for currency exposure hedging and 8.5% for returns.
The remaining 25% of respondents did not use currency management at all. A UK fund commented: "We used to use it for returns, but the currency markets at the time were driven by [the] euro/US dollar, and to make money you had to get those bets right and that seemed to be binary. We don't use [currency management] for exposure hedging as our current view is that the exposure is theoretical if we are not repatriating assets into sterling."
Over 60% of respondents felt that the recent volatility and central bank/government interventions in currency markets make hedging of portfolio foreign exchange exposure more urgent than ever. However, 12.5% of respondents did not agree with this, with a Danish fund stating, "currency risk is a zero-sum game".
Approximately a quarter did not feel strongly either way, and a UK fund stated: "Volatility is not really relevant. You either hedge for risk management or you don't. The current volatility merely highlights the issues that one is trying to address through hedging." Another UK fund added: "Currency effects tend to be neutral over time."
Half of respondents believed that the recent volatility and central bank/government interventions in currency markets creates a huge opportunity for currency alpha managers. A Dutch scheme that disagreed with this commented: "There are no parties that can consistently profit from exchange rate changes." A Danish fund said: "In the long run most of them will lose money." More than a third were undecided about whether or not there was more alpha opportunity available.
Some 63.5% of respondents used just one manager for active currency management, while 27.5% used two to three. Just one respondent used more than five managers.
Only one respondent said their fund had increased its allocation or risk budget to currency alpha management. Though no respondents had decreased their allocation or risk budget, one planned to.
Just 18% of respondents stated they were happy to take active currency alpha risk as part of an unfunded, active foreign exchange hedging overlay programme, as they found it most efficient to combine the hedging and alpha management.
The remaining 82% were not happy to do so, finding it inefficient to constrain their alpha management by combining it with their hedging. "We only hedge our foreign currency exposure if it hits a defined threshold. We don't manage it actively," stated a Swiss fund.
The majority of respondents stated that overweight ‘safe havens' were the active foreign exchange sub-strategy that had performed best for them over the past six months, while other respondents felt others, such as value and emerging markets had performed best.
Most respondents did not believe that a new, prolonged period of ‘currency wars' was beginning, although a Swiss fund said: "[It] might happen. In case we become convinced that the FX volatility will be higher in future than in the past, we could be forced to take more active decisions regarding FX hedging in future."