Christine Lagarde, the likely next president of the IMF, has said in recent weeks that member nations must work together to limit sharp forex movements; one trader told Bloomberg last month that currency volatility was at an all-time high.
Fund houses’ solution to this problem is often in the form of sterling hedged share classes: historically, these have often been offered for Japan funds in an attempt to prevent movements in the yen – a widely-traded currency – affecting returns.
While March’s earthquake in Japan led to an unsurprising spike in yen volatility, uncertainty over the global economy has led to sharper movements materialising in the likes of the dollar and the euro, as markets wrestle with the problems of the eurozone sovereign debt crisis, the US’s own fiscal position and other issues.
The launch this week of a sterling hedged share class for the Highbridge Capital Diversified Commodities Fund is therefore unsurprising – particularly given the dollar-denominated nature of major commodities such as oil.
“Currency risk remains a growing concern for investors and we have launched this as a direct response to the needs of our clients,” says Jasper Berens, head of the UK intermediary business at JP Morgan Asset Management, the owner of Highbridge Capital.
Out of the equation
With the risk on/risk off environment still dominant, investors are unlikely to want difficult markets compounded by currency losses. “Where we can, we prefer to take the currency out the equation”, says Simon Gibson, director at Atkinson Bolton.
“When you look at what is going on and what we expect to go on in currency markets, I think there will be an increasing call for hedged share classes”, he says.
There are nonetheless difficulties in successfully hedging currency risk, particularly around questions of cost and practicality. While recent moves have been notable, the tendency for currencies to trade within a narrow range necessitates prudence, even if volatility within that range appears high. The margin required for hedging purposes may also detract from a fund’s returns.
Assessing whether a currency such as the dollar is due to fall is also far from easy, but the call for more hedging is not so much based on a directional view as it is a suspicion that volatility will remain elevated.
“The US dollar has continued to weaken against sterling for some time and although the last few months have seen the US dollar strengthen somewhat, volatility between the currencies is likely to continue,” says Berens.
Concludes Gibson: "currency movements can be helpful, but at other times they can be just the opposite. We deal with the underlying investment as best we can; we are sterling-taxed investors in a sterling environment after all”.