No one can say where currencies are going to go over a three or six month horizon, maintains Daniel Gloor of the SFr17bn ($11.3bn) Canton of Zurich Insurance Fund. Its involvement with currency hedging goes back to 1994, when the fund was in an under-funded situation (see page 38) and did not want to increase its risks. We wanted a stable portfolio and not to increase volatility because of currency fluctuations," says Gloor.

For a Swiss franc investor, empirical data shows that investing in foreign currency bonds carries a 50 to 60% currency risk, with a 40 to 50% interest rate risk, while for equities it is 30% currency risk. "To hedge a 100% did not make sense," he adds. "Our goal was safety first by reducing volatility. The aim was not to increase returns or be better than the next pension fund. As a hedging programme we knew it would costs us in the long run."

The fund needed a tool with the ability to hedge in different currencies, according to a model, but without any individual prognosis built in, says Gloor. He adds that the only tool available was an "option pricing model" Safeport currency product from State Street, which happened to be the fund's global custodian.

"Our findings are that volatility has been reduced, but very marginally, a matter of around 60 basis points," says Gloor. This year, the fund has dropped the lire and the Spanish peseta as these are now locked into EMU and it was costing too much, but it maintains the remaining seven currencies in the programme.

"In the next two or three years, if we are able to increase our reserves, we will not use it anymore. I am not convinced about derivatives and hedging."

His view about investing is to go and take the risks involved, otherwise invest in Swiss franc bonds.

"However, with the uncertainties with the introduction of the euro, we are sticking to the programme for the time being. But in 2000 or 2001 we willreduce it by 20 to 50%."

He adds: "We did have a difficult environment relating to currencies in the last 12 months and this could change in our favour."

Such decisions can only be made over time, he concedes. "You look at the results and see how it works out. It was an experiment in an area where we did not have experience. But the results are not exhilirating." When the fund decided last year to invest in non-domestic convertibles and small to mid/caps, it skipped hedging . "We said we want wanted to earn money on these risks and we don't want to hedge." Fennell Betson"