UK Fund Managers Increase Currency Hedging in 2024

By Nell Mackenzie

LONDON (Reuters) – A recent survey from MillTechFX indicates that a greater number of UK fund managers have incurred higher costs in 2024 to safeguard their investment portfolios against currency market fluctuations.

This year, 88% of UK fund managers opted to hedge against currency risk, a rise from 75% last year, attributed to increased market volatility among 250 UK asset managers surveyed.

Most managers utilized forex hedges due to options market pricing. Forex options are commonly employed to either hedge against or speculate on potential scenarios in currency markets. The variability in expected volatility influences the cost of an option, akin to an insurance premium.

84% of fund managers reported rising hedging costs, compared to 75% the previous year.

The pound experienced significant fluctuations, hitting a year-low of $1.2296 on April 22, and reaching a 2-1/2-year high of $1.3384 on September 24.

The survey revealed that 89% of respondents noted the strong pound impacting their fund's returns, with sterling strength allowing UK fund managers to access investments priced in dollars more affordably.

Only about 6% of fund managers hedge 75-100% of their portfolios against currency risk, while the majority hedge between 50-75% of their holdings. The largest group of respondents employed currency hedges lasting between four and six months.

Additionally, UK hedge fund managers hedge more aggressively compared to their U.S. peers by 9% according to the survey.