Rules force super funds into shift on currency hedging

New rules and higher costs are forcing superannuation funds to alter how they manage currency risk.

New rules and higher costs are forcing superannuation funds to alter how they manage currency risk, with increasing numbers saying regulations, more than currency moves, dictate changes to hedging policy.

NAB’s director of fixed income currencies and commodities, Emma Lawson, said: “Instead of factoring in what the experts are saying and what’s happening in the currency, which is traditionally what currency hedging is all about, more funds are saying the most important factor is the regulatory rules and environment.”

The findings, outlined in National Australia Bank’s latest superannuation FX hedging survey, show the environment in which funds operate is evolving quickly. Pressure to grow or merge, rapid technological change and higher standards of transparency are also influencing currency hedging policy. Among regulations that have come into force in the past two years are new margin requirements, changes to the tax treatment of gains from foreign FX deals, and rules for disclosing fees and costs. One of the implications of the requirements is that cash earmarked for hedging must instead be used to meet margining needs.

“Applying margin affects their liquidity, how much cash they have available, because hedging has a fairly high cash requirement,” Ms Lawson said.

“All of these things are taking up the fund’s time and resources, as opposed to them addressing their investment needs and hedging requirements.”

Super funds are also starting to hedge at the level of members’ investment choices in a bid to better meet their needs, the survey showed. Someone with a conservative choice would have a high hedge ratio, whereas a high-growth choice would have a lower hedge ratio.

“By bringing expertise in house, the funds have the ability to hedge along those risk-return profiles,” Ms Lawson said.

The survey also revealed most super funds believe the Australian dollar is headed lower, though there was a slight rise in the belief it would move higher. Last month, the currency hit a two-year high of US80c.

Yesterday, the RBA said the dollar was a source of uncertainty. “A further appreciation of the Australian dollar would be expected to result in a slower pick-up in inflation and economic activity than currently forecast,” it said.

While most super funds are counting on a lower dollar, they are increasingly incorporating more dynamic strategies to take advantage of currency moves. This marked a change from the traditional “set and forget” policy, Ms Lawson said.

“If you have a dynamic strategy you can adapt to market conditions so that if you start to see the currency change trend then you can alter your hedge ratio to meet that,” she said.