A report highlights growing concerns among North American
fund managers about foreign exchange (FX) volatility. The report, titled the
MillTechFX North American Fund Manager CFO FX Report 2024, reveals significant
shifts in hedging strategies due to current market conditions and upcoming US
elections.
The study, which surveyed 250 senior finance
decision-makers, found that 65% of fund managers plan to extend their hedge
tenor. This move will provide protection for a longer period against FX
volatility. Additionally, 34% of respondents intend to increase their hedge
ratio, aiming to shield a greater portion of their exposure from market
fluctuations.
The report notes that North American fund managers are
grappling with the impact of a stronger dollar. A substantial 83% of
respondents reported that their returns have been negatively affected by the
strong dollar.
Source: The MillTechFX North America Fund Manager CFO FX Report 2024
Operational costs have also risen for 81% of fund managers, with
34% experiencing a significant increase. Nearly all 93% are concerned about
how the stronger dollar affects their foreign market exposure, with 46%
expressing significant concern.
Source: The MillTechFX North America Fund Manager CFO FX Report 2024
Research shows that the impact of election-related
developments on the US dollar is a primary concern for North American fund
managers, who are adopting strategies to safeguard their returns. The main
concerns include increased volatility 40%, policy changes affecting currency
values 37%, and unpredictable market movements 37%.
Source: The MillTechFX North America Fund Manager CFO FX Report 2024
CEOs are particularly focused on policy changes and
counterparty risk in hedging transactions. Consequently, many fund managers are
adjusting their hedging strategies, with 65% planning to extend their hedge
tenors to enhance protection against volatility .
Eric Huttman, CEO of MillTechFX
Eric Huttman, CEO of MillTechFX commented: “It’s a
fascinating time in the FX market in North America with the greenback
strengthening, despite analysts predicting its value would drop in 2024 coupled
with a highly charged US presidential election campaign which will likely move
markets.”
“It’s clear that fund managers are concerned about the potential FX
ramifications, with many adopting a more proactive approach, protecting more of
their currency exposures for longer as they seek to secure certainty in a climate
that is anything but certain.”
Hedge Ratio Increases to 55%
To address these challenges, 79% of fund managers are now
hedging their forecastable currency risk, up from 72% in 2023. The average
hedge ratio has risen to 55%, compared to 50% last year, and the average hedge
tenor has increased to 5.41 months from 4.96 months. Despite these adjustments,
80% of fund managers have noted an increase in the cost of hedging over the
past year.
Source: The MillTechFX North America Fund Manager CFO FX Report 2024
The report also reveals trends in technology adoption and
operational changes. Nearly all (99%) of fund managers are exploring new
technologies, with a particular focus on process automation 41%.
Additionally, 31% are considering full FX workflow automation . However, a
significant number of fund managers continue to use manual methods for FX
operations, with 26% handling transactions via email and 24% using the phone.
T+1 Settlement Costs Rise
In anticipation of the move to T+1 settlement, fund managers
have made several adjustments. These include increasing staffing 45%,
improving communication with counterparties 43%, and upgrading IT systems
42%. Despite these preparations, 78% reported that the transition to T+1 has
led to higher operational costs.
Source: The MillTechFX North America Fund Manager CFO FX Report 2024
“The other large shift in the market was on the operational
front, as market participants geared up for T+1. They increased staff and
overhauled IT systems, leading to increased costs and this investment ensured
the transition was smooth with CLS reporting that there has been no decrease in
processed volumes,” Huttman added.
Top FX Challenges Revealed
Finally, the report identifies key FX challenges and
priorities. The principal operational challenge is cost calculation 30%,
followed by onboarding liquidity providers 28% and securing credit lines
26%.
The top priority for fund managers is FX counterparty credit 36%, with
uncollateralized hedging coming in second 29%. This report underscores the
current volatility in FX markets and the strategic responses of North American
fund managers to mitigate risks and manage costs.
A report highlights growing concerns among North American
fund managers about foreign exchange (FX) volatility. The report, titled the
MillTechFX North American Fund Manager CFO FX Report 2024, reveals significant
shifts in hedging strategies due to current market conditions and upcoming US
elections.
The study, which surveyed 250 senior finance
decision-makers, found that 65% of fund managers plan to extend their hedge
tenor. This move will provide protection for a longer period against FX
volatility. Additionally, 34% of respondents intend to increase their hedge
ratio, aiming to shield a greater portion of their exposure from market
fluctuations.
The report notes that North American fund managers are
grappling with the impact of a stronger dollar. A substantial 83% of
respondents reported that their returns have been negatively affected by the
strong dollar.
Source: The MillTechFX North America Fund Manager CFO FX Report 2024
Operational costs have also risen for 81% of fund managers, with
34% experiencing a significant increase. Nearly all 93% are concerned about
how the stronger dollar affects their foreign market exposure, with 46%
expressing significant concern.
Source: The MillTechFX North America Fund Manager CFO FX Report 2024
Research shows that the impact of election-related
developments on the US dollar is a primary concern for North American fund
managers, who are adopting strategies to safeguard their returns. The main
concerns include increased volatility 40%, policy changes affecting currency
values 37%, and unpredictable market movements 37%.
Source: The MillTechFX North America Fund Manager CFO FX Report 2024
CEOs are particularly focused on policy changes and
counterparty risk in hedging transactions. Consequently, many fund managers are
adjusting their hedging strategies, with 65% planning to extend their hedge
tenors to enhance protection against volatility .
Eric Huttman, CEO of MillTechFX
Eric Huttman, CEO of MillTechFX commented: “It’s a
fascinating time in the FX market in North America with the greenback
strengthening, despite analysts predicting its value would drop in 2024 coupled
with a highly charged US presidential election campaign which will likely move
markets.”
“It’s clear that fund managers are concerned about the potential FX
ramifications, with many adopting a more proactive approach, protecting more of
their currency exposures for longer as they seek to secure certainty in a climate
that is anything but certain.”
Hedge Ratio Increases to 55%
To address these challenges, 79% of fund managers are now
hedging their forecastable currency risk, up from 72% in 2023. The average
hedge ratio has risen to 55%, compared to 50% last year, and the average hedge
tenor has increased to 5.41 months from 4.96 months. Despite these adjustments,
80% of fund managers have noted an increase in the cost of hedging over the
past year.
Source: The MillTechFX North America Fund Manager CFO FX Report 2024
The report also reveals trends in technology adoption and
operational changes. Nearly all (99%) of fund managers are exploring new
technologies, with a particular focus on process automation 41%.
Additionally, 31% are considering full FX workflow automation . However, a
significant number of fund managers continue to use manual methods for FX
operations, with 26% handling transactions via email and 24% using the phone.
T+1 Settlement Costs Rise
In anticipation of the move to T+1 settlement, fund managers
have made several adjustments. These include increasing staffing 45%,
improving communication with counterparties 43%, and upgrading IT systems
42%. Despite these preparations, 78% reported that the transition to T+1 has
led to higher operational costs.
Source: The MillTechFX North America Fund Manager CFO FX Report 2024
“The other large shift in the market was on the operational
front, as market participants geared up for T+1. They increased staff and
overhauled IT systems, leading to increased costs and this investment ensured
the transition was smooth with CLS reporting that there has been no decrease in
processed volumes,” Huttman added.
Top FX Challenges Revealed
Finally, the report identifies key FX challenges and
priorities. The principal operational challenge is cost calculation 30%,
followed by onboarding liquidity providers 28% and securing credit lines
26%.
The top priority for fund managers is FX counterparty credit 36%, with
uncollateralized hedging coming in second 29%. This report underscores the
current volatility in FX markets and the strategic responses of North American
fund managers to mitigate risks and manage costs.
