If you’re asking this question you have probably already identified a risk and decided to do something about it. It would be common in this scenario to do some research, speak to a couple of banks, maybe get some quotes to see how much each strategy would cost, and so on. However, in our opinion it is crucial to first consider the symptoms to get a diagnosis, then figure out the appropriate treatment, before finally issuing the prescription. A medical doctor does not last long if this process isn’t followed, and the same is true for a risk manager. Therefore the process should look more or less like this:
- understand how, where and when the risks appear
- quantify the probability of these risks occurring and the magnitude of negative impact it could have
- decide on risk management objectives, e.g. how much of the risk you want to reduce and how much you’re willing to pay for that
- design a hedging strategy that is as effective and efficient in meeting these objectives as possible
- consider any constraints, such as operational complexity, liquidity requirements or similar
- make a decision and document the process in form of a policy, then execute.
Everyone wants to ensure they’re not doing anything too off-market, so this is a very common, and very sensible question.
Our insight into the market is extensive. We work with hundreds of funds and other market participants and we execute more than $100 billion in hedges every year. This gives us a unique perspective of the state of the market, and we would be very happy to take a look at your business and discuss how it compares.
This question could lead to a long discussion we would prefer to have face to face, but here are three main reasons:
- We are completely independent. We do not have any incentives to sell hedging products or entice clients to increase trading volumes. We are tasked with looking after the client’s best interest, and we assume a fiduciary responsibility to do so.
- We are dealing with a large part of the market every day – different clients, different banks, different lawyers, and other service providers. This gives us a unique perspective which is very difficult to replicate in-house.
- We have a vast amount of experience and a combined skill-set honed to provide our clients with the best possible advice. We also ensure continuity, avoiding key man risks and the negative results from staff turnover in critical business divisions. We don’t want our clients to rely purely on us of course, we work very closely with their key members of staff – the best way to look at us is a valuable extension to your own team and resources.
Our core client base consists of fund managers who invest in private (and most often illiquid) assets, notably Private Debt / Direct Lending funds, Private Equity Funds, and Real Estate and Infrastructure funds. In this space we work with many of the largest fund managers in the world, but we also work with smaller funds and first time managers who want to ensure that they remain competitive in a fast growing market. Institutional investors (Limited Partners) also make use of our services, e.g. for the management of currency overlay programmes or designing strategies for better managing draw downs and distributions in foreign currencies. We also frequently engage with corporate businesses large and small, typically to help them manage risks such as FX, interest rates, or commodity prices in the most effective and efficient way, while taking into account their unique business dynamics.
Few people consider only the upside potential when valuing an asset. Any risk that can cause a deterioration of the investment value or cause a deviation from the investment model should be carefully assessed. It does not mean that this risk has to be managed or removed, but if you’re not expecting a return from this risk, why wear it?
Market risk is typically associated with some kind of value deterioration. However, exposures can also result in appreciating values. Negative Mark-to-Market of hedges just means that this has happened, i.e. your underlying asset is now worth more, but because you hedged this exposure the value of the hedges depreciate in a corresponding fashion. The net result is what matters. However, negative MtM should be monitored carefully because it may trigger a margin call from your bank. This eventuality should be carefully planned for in advance, because margin calls are not great news for close-ended funds with illiquid underlying assets. We have designed solutions to this for almost a decade so give us a call to discuss these considerations in more detail.
Not unusual, especially these days when many loans are provided by non-bank lenders who do not offer these kind of bolt-on products. What you probably need is an interest rate instrument, for example a swap or a cap. However, it’s important to look at your business dynamics alongside the nature of the loan to determine the best way to satisfy the lender’s requriements while being suitable for your business. Contact us to learn more.
This is a highly relevant topic these days. Hedged Currency Feeder Funds, Hedged Currency Sleeves, or Hedged Share Classes are three names for more or less the same product. It allows investors to commit in a different currency than the denomination of the master fund, with returns protected (at least partially) from the currency exposure that would arise from such a transaction. We have a wealth of experience in this field, having designed, executed and managed a large number of hedged feeder funds for a number of investment managers globally. Contact us to learn how we can help you too.
Many people seem to think so, and perhaps this is because people think of ‘hedge’ funds as speculative. Nevertheless, the whole concept of hedging – in a risk management capacity – is to avoid speculation. If you have identified risks that you do not expect a return from, then in most cases it makes sense to mitigate these risks. Hedging is one way to do this.
Yes is the short answer. “It depends” is the more appropriate one. We have worked with a number of investors, corporates and funds to design effective hedging programmes in Emerging Markets, and have collaborated with government agencies around the world to improve the process of risk management in these markets. Speaking at the UN General Assembly in 2018, Validus pointed out that if currency risk can be better managed in Emerging Markets, then hundred of billion of investment dollars could be channelled into these much needed regions. Our solution is a combination of robust methodologies, analyses and strategies, collaboration with market participants, and support from government agencies. Watch this space. In the meantime, contact us to see how our existing services can help you today.
Yes! On behalf of our clients we work with a large number of banks all around the world on a regular basis. We understand how they work and we are able to project manage and speed up processes such as onboarding, establishing ISDAs, negotiate Fund Finance facilities, etc. We also work closely with our clients’ lawyers and other advisors to ensure a seamless process.
We charge our clients fees commensurate with the work we do. However, the preference from both sides tends to be to agree a fixed fee up front, whether that is for projects or retainers.
The cost of a hedging programme depends on a number of factors, e.g. hedge ratio, tenor, credit support and execution fees. However, the largest impact typically arises from interest differentials and/or option premia. It’s interesting to note however that forward points (derived from the interest differentials between two currencies) can be positive or negative. This means that hedging doesn’t always come at a cost. Many investors are protecting themselves from a weakening investment currency while at the same time participating from the FX carry (positive forward points).
A big issue for alternative investment funds is that there is a high degree of uncertainty around timing and volume of future cash flows. How can you hedge a risk that you can’t define? We have developed methodologies to solve for this issue, and a large number of alternative asset managers around the world have successfully managed their currency exposures as a result of our advice and assistance. Please contact us to find out more.
Close-ended funds with illiquid underlying assets are extremely sensitive to margin calls. Cash drag has a negative impact on IRR of course, but even more unsavoury is the prospect of having to call capital from LPs or sell assets to fund requests for cash margin. That’s why we have developed strategies to manage this, as well as having worked with a number of banks for almost a decade to develop credit support mechanisms to allow funds to utilise the banks’ balance sheets for this purpose instead of their own.
We don’t create products the way banks do, because we do not make money from transactions. However, we have created a service that is based on methodologies developed in partnership with private equity investors in Emerging Markets, as well as government agencies. This utilises proxies that can be used to hedge part of the currency risk in countries where traditional hedging instruments are either not available or too expensive. Please contact us to find out more.
Great question! Sadly, there is no straight forward answer. Some do, and some don’t. And there are grey zones in between. We have a number of Private Equity clients who systematically hedge the downside risk their investments face from currency exposures throughout the life of their fund. But we also have a number of clients who utilise a more tactical approach. We also have some clients who don’t hedge currency risk, but they use our analytical tools and advisory services to better inform their investment process and to fine tune pricing. Look out for our annual FX survey to get an overview of how alternative investment funds hedge currency risk.
Absolutely. We work closely with new clients to determine which services are appropriate to them and what level of support they need. We take a very customised approach to all engagements, and it is important to us to ensure that everything we do for our clients adds value.
Yes. RiskView is highly customisable, both in terms of the on-screen monitoring and in terms of outputs such as reports. We work closely with our clients to design RiskView to their specificiations.
Best Execution is a core part of our hedging management service. We help clients define their Best Execution Policy (which can include other KPIs than just the cost of transactions) and our dedicated execution desk will carry out any transactions in line with this. Most clients choose to outsource this process to us, but we can also act as an extension to the clients own trading team, if they have one.