The strengthening U.S. dollar is pushing renewed efforts by pension fund executives to hedge currency risk in their portfolios.
Randall Baum, chief investment officer of the $2.1 billion Denver Employees Retirement Plan, said the pension fund's board is in the early stages of considering implementing a currency hedging strategy.
“The depreciating dollar cost our portfolio 200 basis points in 2014, and that hurt. So that got our attention,” he said. “We're trying to take some risk off the table.”
Mr. Baum noted, however, that over the last 30 years, “being unhedged has been beneficial to our portfolio returns.”
The goal of currency hedging or currency overlay programs is to mitigate losses and maximize gains that arise from risk inherent in owning securities denominated in foreign currencies. In currency overlay programs, exposures to foreign currencies are treated as a separate decision from the asset owner's overall asset allocation.
Those decisions have become increasingly important as the dollar has strengthened in the last year, and on March 6 hit its strongest position against the euro since 2003.
Daniel Gamba, a managing director at BlackRock Inc. in New York, said that over the past five years, BlackRock's America's institutional team dealt with roughly 20 to 30 inquiries on currency hedging programs each year. In the last six weeks, the team has had somewhere in the vicinity of 50 to 60 inquiries.
“The number of clients reaching out to our currency hedging desk asking what they should do has doubled in (the first two months of) 2015 alone (from previous years),” said Mr. Gamba.
BlackRock oversees $94 billion in currency hedging strategies globally.
Collin Crownover, a senior managing director and head of global currency management at State Street Global Advisors, Boston, said SSgA officials have had more meetings with clients about currency hedging in the last five months than they've had in the last five years.
“People really have to start losing money before people take notice. And that started to happen in 2014, which has caused the surge in interest,” Mr. Crownover said.
The dollar is rallying because the U.S. is pulling back on its quantitative easing policies, suggesting interest rates are likely to rise, while major central banks around the world have been either increasing or starting QE efforts, which pushes down interest rates.
In addition to these moves, the U.S. economy has also shown a lot more strength than other global economies.
Decisions by some central banks in Europe — like the Swiss National Bank announcing on Jan. 15 that it would no longer hold the Swiss franc at a fixed exchange rate with the euro, and the Danish central bank cutting its benchmark interest rate to below zero on Feb. 5 — are also leading asset owners to consider hedging their foreign currency risk.
From June 30 to Feb. 27, the euro was down 18.23% vs. the dollar, while the yen was down 15.3% vs. the dollar.
Since mid-2014, the U.S. Dollar index has risen to its highest level since 2003. The index increased to 96.34 on March 5 from 79.8 on June 30 — a gain of more than 20.7%.