One of the most experienced pension fund users of currency management techniques in Europe employs passive full hedging of its five major currency exposures, and in addition uses a number of external managers and internal programmes that take aggressive active bets on all currencies. Having more than one currency manager for core programmes is also popular. The Belgian medical profession’s E486m VKG fund splits its E200m currency programme equally between AG Bisset and SSGA, and operates two different fee structures, one fixed and one with a performance fee linked to profits. Both operate to a maximum hedge ratio of 100% of fund exposures but each use a different strategy to gauge optimal hedge ratios. As Karl Haeck, investment director at VKG explains, “it is up to the managers to decide how much of the fund’s exposure is hedged”, revealing that VKG through its currency programme has recouped 70% of its currency losses. Not that VKG’s programme has always been successful, as Haeck recalls, “for the first two to three years of operation, the currency programme cost money, and there was a point where a few of the trustees lost faith.” However, gains in recent times have renewed confidence in the scheme, to the extent that VKG is entertaining the possibility of an active independent currency mandate in the future.
The higher the foreign exposure of a fund, the more critical becomes the decision on how to manage currency. Around three quarters of the assets of the Swedish AP funds are invested outside Sweden. Most already have passive internal hedging programmes in place, and two of Sweden’s AP funds are also planning to award active external currency mandates in the medium term. AP7, which has run a passive 50% hedged overlay in-house since 2000, plans to award an active currency mandate in the first quarter of 2004. Richard Grottheim, executive vice president at AP7 explains, “We have been persuaded that it is possible for currency managers to add value, in what we first perceived to be an efficient market, because the flows of many market participants are not for purely economic reasons.” AP7 hedges all its non-Swedish Kroner assets, an amount equivalent to $2.2bn. The AP1 fund hedges 85% of non–Swedish exposures internally, adopting an active style. It recently postponed plans to award external mandates, the reorganisation of its equity exposures having a greater priority. An AP1 spokesman suggested that any hiring would be partly to generate additional performance and to have an external manager to use as a sounding board for its own currency views.