Amid a year of geopolitical turbulence and currency volatility, UK fund managers are boosting their FX hedging strategies. A recent report showed a remarkable 88% of fund managers now hedge forecastable currency risks, up significantly from 75% in 2023.

Geopolitical Tensions Drive Hedging Strategies

The report by MillTechFX showed that unpredictable geopolitical developments, including the recent US election, have compelled UK fund managers to adopt more robust FX hedging measures.

Concerns about market volatility, shifting policies, and fluctuating currency values have led 55% of managers to extend hedge durations, while 33% have increased hedge ratios.

Even among those who previously avoided hedging, over half are reconsidering their stance due to volatile conditions. The study highlighted the broader adoption of FX options, with 86% of fund managers using them more frequently to manage risks.

Commenting about the finding, Eric Huttman, the CEO of MillTechFX, said: “As 2024 draws to a close, UK fund managers may finally find a moment to catch their breath. Global conflicts have been a continued source of geopolitical instability, causing heightened currency volatility for fund managers. Whilst the outcome of the recent US election has already had a large impact on all markets.”

“It’s encouraging to see more fund managers hedge their FX risk and secure some level of protection, though there are still those with unhedged currency exposure that risk severe financial consequences. Fund managers must now decide whether the cost of hedging is worth the potentially unlimited cost of not doing so.”

While hedging offers stability, it comes at a growing price. A notable 84% of fund managers report increased FX hedging costs compared to last year. Despite these challenges, the emphasis remains on securing predictable returns.

The pound’s fluctuating strength in 2024 has also shaped fund strategies. After hitting a two-year high against the dollar, the stronger pound delivered tangible benefits: 87% of fund managers reported improved returns.

Mid-sized funds, managing £400-800 million in assets, reportedly felt the strongest positive impact from the pound’s performance. This strength enhances purchasing power for dollar-denominated assets and boosts portfolio diversification.

T+1 Settlement Adjustments

With the introduction of the faster T+1 settlement cycle in the US, UK funds have adapted by upgrading technology, restructuring working hours, and engaging external services. Each of these strategies was employed by 33% of surveyed managers, reflecting the sector’s readiness to embrace operational changes.

Automation and AI are reshaping fund management workflows. A striking 93% of fund managers plan to adopt AI, particularly in FX settlement processes and risk management .

However, manual processes like email and phone transactions still dominate but are gradually being phased out. UK fund managers prioritize cost transparency as they contend with hidden fees embedded in FX transactions.