The evidence of growing competition in the private debt asset class is shown by the data. According to PDI figures, the last year has seen $133 billion raised by funds holding a final close – an 8 percent increase on the previous year.
This competition inevitably puts the squeeze on funds, with borrowers able to negotiate better rates and investor returns driven down. In this environment, fund managers need to do everything in their power to maximise returns and minimise risks.
One area of increasing focus is foreign exchange (FX), with a recent wave of volatility – driven by political sentiment rather than economic fundamentals – fuelling demand for currency strategies.
One of the most recent examples of this volatility was the EU referendum in the UK, after which sterling fell by 20 percent and 15 percent against the US dollar and euro respectively.
The upshot has been “a huge increase in funds looking to fully hedge their portfolios in an effort to eliminate currency risks entirely and protect investor returns following the referendum”, according to Ashley Hall, a sales director at Afex*.
Hall warns, however, that spreads and hedging costs can vary wildly and firms looking to hedge across entire portfolios can find profitability being eaten into substantially.
Moreover, funds are often required to post collateral and maintain allowances for margin calls to secure FX hedging facilities and this can erode the working capital available to invest.
Therefore, funds may put in jeopardy the returns they are seeking to protect unless they choose their FX products carefully.
*This is an abridged version of an article written by Ashley Hall, a sales director, fund & institutional EMEA, at Afex, a London-based global payment and risk management solutions specialist. The full version can be found in the July/August issue of PDI.