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Alternative Market Briefing

FX hedging can mitigate downside risk

Wednesday, December 31, 2014

Bailey McCann, Opalesque New York:

Failure to hedge currencies can lead to misleading performance figures according to delegates at the recent Opalesque Australia Roundtable. For managers that avoid FX hedging, in some cases relying on dollar denominations can mean that foreign investors actually lose, even though fund performance is reported as a net positive.

Damien Hatfield, Head of Sales, Australia, Ascalon Capital explains that when he moved into fund management he "started to find a lot of fund managers in Australia didn’t hedge the currency. That means if they are running U.S. dollar assets, they were happy to leave the assets in whatever the asset currency might be. When I ran my book in the '90s, I had raised the assets in A$ but even if the performance of the managers was good, but because the U.S. dollar moved against us, I would still have to go back to the client and explain why his portfolio had a loss. Of course I wanted to avoid that, so I was always fully hedged (for A$ investors in A$ performance)."

Today I am still absolutely staggered to see that Australian fund managers don’t hedge the currency and leave the assets in multiple currencies. In fact, I also know a number of managers that have received awards as "manager of the year", but it wasn't their performance that got them there, but the currency contribution."

Hatfield notes that this view is part of ......................

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