Currency volatility is no longer the best friend of alternative investors, with recent swings biting into investors' international investments.
Although most limited partnership agreements give managers the right to hedge currency risk, few general partners do. The reasons are that the long-term nature of investors' commitments is expected to mitigate the highs and lows of currency swings and currency hedging is expensive. But for many investors and managers it is not working out that way.
New Mexico State Investment Council's most recent real asset report by consultant Townsend Group revealed that the endowment's $532.9 million real assets portfolio had a -7.9% net return for the year ended Sept. 30. Since the portfolio's 2011 inception, NMSIC has committed approximately $1.6 billion to real assets across 21 funds with 14 managers. The pension fund's internal rate of return to Sept. 30 from inception was 3.4%, down from the IRR of 8.5% as of Dec. 31 from inception, the report noted. Townsend attributed the short-term return to currency swings.
Alternative investments firm Ares Management LLC reported a $2.7 million loss in the first quarter due to currency translation.
And the Blackstone Group attributed a portion of its 38% drop in total revenue to $4.6 billion for the year ended Dec. 31 to currency translation. The New York-based alternatives investment firm suffered a $49.2 million currency translation loss in 2015. However, the situation improved in the first quarter with a $17.6 million currency translation gain.
Volatility “will come up more and more because of the dramatic movement in currency,” said Christopher J. Ailman, chief investment officer of the $186.8 billion California State Teachers' Retirement System, West Sacramento. “People are going to need to deal with it.”
CalSTRS is dealing with currency risk through a portfoliowide strategy it has had in place since 1995. But, Mr. Ailman added, CalSTRS is one of the few public pension plans that has such a strategy.
“Currency risk is an important risk factor and its relevance has increased over the past couple of years,” said Thierry Adant, investment consultant, credit research in the New York office of consulting firm Willis Towers Watson PLC.