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Business Resilience Europe Insights

9 in 10 Fund Managers Accross the US, EU and UK Prioritise ESG When Selecting Counterparties

A higher percentage of European fund managers are looking to diversify their counterparties (90 per cent) than those in the UK (80 per cent) with more European fund managers suffering from a lack of transparency in the financial exchange (FX) market according to research from FX-as-a-service firm, MillTechFX.

Specifically, the FX-as-a-service found that in the EU 82 per cent of respondents believe there is a lack of transparency while in the UK this figure drops by nine per cent. The opacity is likely due to their inability to compare the market with getting comparative quotes cited as one of the biggest FX challenges fund managers face. The findings were released in the European Fund Manager CFO FX Report 2024, a part of MillTechFX’s global research series

The series aims to provide a window into the FX challenges faced by fund managers around the world and how they are adapting their FX risk management strategies, hedging practices and overall priorities to stay ahead of the curve.

Eric Huttman, CEO at MillTechFX
Eric Huttman, CEO at MillTechFX

Eric Huttman, CEO at MillTechFX, commented on the findings saying: “Despite being one of the largest markets in the world, the FX market is also one of the most opaque. Fund managers across the globe come up against hidden costs and usually only work with a small number of counterparties due to operational complexities, meaning they’re often left in the dark about whether they get a good deal or not.

“Despite volatility calming and the increasing price of hedging, it’s clear FX is impacting European fund managers’ returns and, as a result, they are prioritising FX risk management. In the past year, the majority have increased their hedge ratio to protect their returns while lengthening their hedge lengths, most likely to give them more certainty.”

Rising costs

Additionally, it reveals that FX hedging costs are rising globally, with 84 per cent of European fund managers, 75 per cent of UK fund managers and 71 per cent of North American fund managers stating their hedging costs had increased in the past year.

Although FX volatility has decreased since peaking towards the end of 2022, currency moves are still having a significant impact, with 89 per cent of European respondents stating that their returns were affected by EUR volatility and 88 per cent stating FX was significant to their business.

Adjusting priorities

Fund managers are prioritising hedging strategies to protect their returns with 77 per cent hedging their forecastable currency risk. Meanwhile, 88 per cent of those who don’t, are considering doing so.
Furthermore, 53 per cent are considering hedging for the first time ever due to ongoing FX market volatility. Three-fifths of European respondents that hedge forecastable risk, hedge a large proportion, while nearly one-fifth (17 per cent) hedge all their exposure.

The average hedge ratio among European fund managers is 40-49 per cent and 61 per cent of respondents said their hedge ratio was higher than last year. Just seven per cent said it was lower. The average hedge length was 4.82 months with 52 per cent stating this was longer than last year and just 6% stating it was shorter.

Looking ahead, 50 per cent of European respondents are increasing their hedge ratio. Forty per cent are also increasing their hedge window. On the other hand, only 19 per cent are decreasing their hedge ratio and 16 per cent are decreasing their hedge window.

Looking ahead

Following the collapse and takeover of Credit Suisse, more European fund managers are looking to diversify their counterparties than those in the UK and US. Ninety per cent of EU respondents compared to 80 per cent in the UK and 81 per cent in the US.

When deciding what factors would impact selecting counterparties, ESG was a resounding priority as 96 per cent of fund managers said it was something they looked out for. Similarly, 94 per cent of EU respondents and 89 per cent in the UK said the same thing.

Forty-three per cent of European fund managers use email to instruct financial transactions. Meanwhile, a third (33 per cent) of respondents still use phone calls.

Huttman added: “The research has also revealed some interesting global trends, such as more European fund managers diversifying their counterparties than their UK and North American peers. It also highlights that ESG is a global priority with the vast majority of fund managers in Europe, the UK and North America taking counterparty ESG credentials into account.”

Alleviating burdens

This is a burden for fund managers, with results showing that they spend 2.6 days per week working on FX-related activity and assign nearly three people with FX tasks on average. It’s therefore no surprise that 87 per cent of European respondents are exploring automation. This is higher than in the UK (79 per cent) and North America (78 per cent).

“Many European fund managers are still reliant on manual processes to transact in FX which is wasting time and resources. The majority are turning to automation brings major benefits including centralised price discovery, creating an end-to-end workflow, heightened transparency and faster onboarding – all of which can provide fund managers with a clearer view of their FX costs as well as greater operational efficiency,” concluded Huttman

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