GoldenSource Blog

What Price Failure to Get on Top of FX Risk?

As global FX volumes rise, GoldenSource explains why certain asset managers and hedge funds are seeking alternative ways to manage pricing risk

From the EU extending sanctions on Russia to China devaluing the Yuan, there is no shortage of events affecting a fund manager’s investment strategy. But in the midst of such volatility, the priority for any fund manager remains the same: deliver absolute returns in an increasingly competitive, intricate and highly regulated market.

It’s no secret that one of the keys to achieving this is managing high levels of pricing risk across FX and certain fund managers will be aiming to alter their positions – at the same time as keeping a large exposure to their base currency. While fluctuations in currencies such as the USD and GBP are reasonably predictable, funds that manage a base currency of say the Russian Ruble (RUB) are exposed to greater uncertainty.

A highly volatile base currency can elicit an excessive amount of risk, which presents a serious challenge for a risk manager who must anticipate the future in order to hedge against exposure. While risk managers may have stress testing processes in place, this won’t fully illustrate how their exposure is affected by increasing currency volumes. Formulating accurate prices as volumes rise to better understand exposure is clearly the challenge here.

With this in mind, certain fund managers have taken the approach of building spreadsheets and relying on manpower to analyse high volumes of data. Unfortunately, this strategy ultimately results in less accurate prices. Consequently, fund managers have begun to seek an alternative – one that not only allows a third party to cleanse data for more accurate prices, but also to manage the infrastructure. It’s easy to see why, as with pressure to reduce bottom line costs; no fund manager wants to shoulder the burden alone.

For fund managers with a volatile base currency, relying on people intervention is a risk – particularly in today’s market. However, for those that adopt the third party route, unpredictability could translate as opportunity. Selecting this approach should lay the platform for better fund performance which means higher revenues. In this risk-conscious world, having strong foundations is the first step on the road to delivering those all-important returns for investors.

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