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.

Fund Managers Extend Hedging

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.

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.

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%.

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 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.

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.

“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.