Combining Currency Hedging with Alpha Generation

Adrian Lee, president and CIO at Adrian Lee & Partners, explains why combining currency hedging with alpha generating strategies can benefit investors.

When questioned about whether clients are looking for hedging or alpha from currency managers, Lee responds that many clients actually need both simultaneously.

He continues: “The challenge of risk management is that currencies are a biggish risk – there’s no long-run return really, so on paper it makes sense to reduce it. But when you start to do these hedges after you’ve got the international assets, you’ve got to get the currency exposure back… with that [you have] really strong cash flows because if you hedge half your 20% international, it’s 10% of your whole portfolio. If that goes against you [the impact on] performance in a quarter could be massive.”

Lee says that, although the cash flow can be underwritten by gains on the portfolio, clients often don’t see it that way and as a result, find risk management to be a scary prospect from an operational standpoint.

But coupling currency risk management with alpha management, adds Lee, can actually help investors because during the time that their cash flow is negative, the currency manager will – hopefully – have undone that hedge for them to a degree.

“So putting the two together is very powerful,” comments Lee, before pointing out: “The problem about alpha is that clients really need to have confidence in their manager and there aren’t many managers who do this well and have been doing it for a long period of time.”

Elsewhere in the interview, Lee outlines the case for active currency management and explains why evolving market conditions mean that more investors could benefit from this approach.

The full interview can be watched here:

Adrian Lee, president and CIO at Adrian Lee & Partners, explains why combining currency hedging with alpha generating strategies can benefit investors. When questioned about whether clients are looking for hedging or alpha from currency managers, Lee responds that many clients actually need both simultaneously. He continues: “The challenge of risk management is that currencies are a biggish risk – there’s no long-run return really, so on paper it makes sense to reduce it. But when you start to do these hedges after you’ve got the international assets, you’ve got to get the currency exposure back… with that [you have] really strong cash flows because if you hedge half your 20% international, it’s 10% of your whole portfolio. If that goes against you [the impact on] performance in a quarter could be massive.”

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Galen Stops

Galen Stops