Specialist currency hedgers are cheering the sharp climb in the U.S. dollar relative to other major currencies, anticipating an increase in the use of currency overlay management.
Currency managers and pension executives say a continued rise in the dollar could result in non-U.S. allocations taking losses for the year, which should catch the attention of U.S. pension funds with significant international mandates.
The rally is much needed by currency managers. Lisa Schulz, a senior research analyst for Frank Russell Co., Tacoma, Wash., said many currency managers moved into positions that benefited from a rising dollar a little early. Because of that, performance has been hurt over a long period of time, she said. With the rebound in the U.S. dollar, currency overlay managers may recoup some of their losses, she said.
The dollar has reversed much of the losses it took earlier in the year relative to the Japanese yen and the deutsche mark, largely as a result of a shift in Japan's policy toward the yen. Concerted buying of the dollar by central banks in the United States, Japan and Germany has produced significant short-term rises in the dollar.
Consequently, any currency-related gains on non-U.S. portfolios are falling fast.
The U.S. dollar rose to 96.75 yen as of late Aug. 16, up from its low for the year of 79.75 in intra-day trading on April 19, according to J.P. Morgan & Co., New York. Relative to the deutsche mark, the dollar was quoted late Aug. 16 at 1.48, up from its low for the year of 1.35 on March 8.
Unhedged international portfolios are down significantly - almost 6% - in currency terms from the beginning of July, said John Taylor, chairman and chief investment officer of FX Concepts Inc., a New York-based currency manager. The swift rise in the U.S. currency has raised the interest of pension executives, he said.
"Now (currency hedging's) gone from the back burner - maybe the pot was off the stove - to the front burner," Mr. Taylor said.
Currency overlay "had been a difficult business since 1989," the last time the U.S. dollar had a significant rally, he said. Plan sponsors were asking, "'What are we looking at currency overlay for if the dollar always goes down?'" he said.
With the recent dollar reversal, pension executives who implement currency hedging strategies are "finally seeing some benefit for what they thought was the right thing to do," he said.
Still, most pension executives won't see the effects of the currency movements until third quarter performance is reported, many currency managers say. Unless currency rates were already an issue for a sponsor, it will take a continuation of the current rally through the end of the year to get an increase in currency overlay hires.
W. Bruce Livingston, chief investment officer for the Massachusetts Pension Reserve Investment Management Board, Boston, said "it's too early to tell" what the effect of the dollar's rise will have on currency hedging programs. Mass PRIM allows some of its active equity managers to hedge themselves, and uses currency overlay on its passive assignements and for those manager that prefer not to hedge. It uses a 50/50 hedged benchmark.
Mr. Livingston said the board's officials have been satisfied with its currency overlay even though the dollar was generally falling, until recently. When the program was put in place, they "recognized that if the dollar continued to drop, there would be losses due to currency," he said. Even with its currency losses, the board's overall exposure to international is "a significant net positive," he said.
"Actually, whether this does indeed inspire people to take currency overlay more seriously is an open question," said Peter Willet, manager of currency investments for PanAgora Asset Management, Boston.
This move is significant enough to draw attention initially, but most clients tend to look at things over a longer time period, Mr. Willet said. "It would be nice if people were alerted to the danger of the appreciation of the dollar, but I don't want to be an alarmist," he said.
Graham Spiers, managing director for State Street Global Advisors, Boston, said a month or two of losses in an international portfolio generally won't be enough to get a pension executive to jump into a new currency hedging program.
Likewise, Dirk Morris, vice president of J.P. Morgan Investment Management Inc., New York, said it's too early to gauge the amount of investor interest in currency overlay that might result from the dollar's jump.
If the dollar were to continue to rally to the end of this year, it "probably would generate a wave of interest," Mr. Morris said. Some of that could come as early as the fourth quarter, although most would come in 1996.
A longer-term force at work in favor of currency hedging specialists is the rising allocation to non-U.S. equities.
Jeffrey Geller, executive director and portfolio manager for BEA Associates, New York, said interest in currency overlay had been rising all year already, following increased movement of U.S. pension assets overseas. Even then, it has been more a topic of discussion than of action, he said.
Ms. Schulz of Frank Russell notes just getting into international investing is a big step, and a separate currency overlay manager is a step beyond that. As international investment grows, interest in currency management grows with it, she said. But, she doesn't think the rate of hiring of international hiring has increased this year, she said. It will be interesting to see if the dollar's strength does have an effect, she added.