Institutional investor demand for dynamic currency hedging strategies is growing, and U.S. investors — perennial wallflowers at the global hedging ball — might finally be ready to join the party, money managers say.
In recent weeks, two big institutional investors — the $286.4 billion California Public Employees' Retirement System, Sacramento, and $7.1 billion AUSCOAL Super, Sydney — announced they would shift to dynamic hedging programs from passive ones. (All figures in this story are U.S. dollars.)
The ongoing “tapering” of the U.S. Federal Reserve's quantitative easing policy and diverging country growth profiles are making for less predictable return and volatility patterns across currencies, prompting a broad swath of institutional clients to review trend-following passive approaches. For the bulk of U.S. investors, by contrast, it's more a matter of rethinking their hands-off stance toward currency hedging.
For currency managers earning scant fees of as little as three basis points on the notional overseas exposure they hedge passively for clients, dynamic strategies — with fees in the low to midteens — are a higher-margin business.
CalPERS has yet to announce how it intends to implement its active hedging strategy.
AUSCOAL tapped State Street Global Advisors to hedge its $1.4 billion in overseas exposure, using the Boston-based firm's dynamic strategic hedging strategy.
That strategy, with $16.5 billion in client assets, has enjoyed the highest demand in recent years — from Australian, European and, increasingly, U.S. investors — among the range of offerings that comprise SSgA's $112 billion currency business, said Simon Sukhaseume, a Sydney-based senior portfolio manager and head of currency with SSgA, in an interview. Mr. Sukhaseume declined to name any new U.S. clients.
Other currency managers report the same trend.
“We've certainly seen growing interest in recent months in dynamic hedging strategies,” with much of that interest coming from U.S. investors, said James Wood-Collins, CEO of London-based currency manager Record PLC. Mr. Wood-Collins declined to name any U.S. clients.