Following a long period of low interest rates and limited currency volatility, a new era of currency volatility has arrived. In the US, interest rate cuts by the Federal Reserve coupled with broader macroeconomic and political uncertainty mean the U.S. dollar fell by roughly 10% against other major currencies, marking 2025 the largest annual decline since 2017.
Globally diversified portfolios are now facing challenges across a combined geo-political environment, where each currency and country pair must be assessed carefully. This includes individual stocks as well as interest rate forecasts for any fixed income instruments, and a currency management portion that is intertwined with both asset classes.
Why are asset owners addressing currency volatility with centralized currency management?
This has led asset owners to centralize their currency management, enabling them to incorporate numerous factors:
- Correlated returns between currencies and stock returns
- Fund vs manager discretion on currency hedge ratios
- Aggregating offsetting currency positions to minimize trading costs
- Responding in real time to news in currency markets via overlay programs
This framework also aligns with a Total Portfolio Approach (TPA), which is becoming increasingly influential among asset owners. It allows multiple factors and any overlays to be consolidated within centralized function, eliminating the need to delegate decisions to multiple managers.
Are there associated considerations with this approach from a performance attribution perspective?
Although centralized currency management offers significant advantages, many asset owners underestimate the associated complexity of a single implementation. This ultimately leads to challenges in analyzing how each decision contributes to total fund performance. Most of these challenges stem from the need to aggregate all the required data, as outlined below.
Differentiating between trade rates and benchmark ratesMost funds will be targeting the 4pm close rate for their portfolios, but what reporting is in place to monitor the gap between the achieved trade and the actual close? How does that number compare to the average execution spread? |
Achieving optimal FX executionHow can the fund monitor that it is achieving value for money in FX execution, whether through in-house desks or third-party managed services? |
Capturing currency markets in real timeCurrency markets do not close simultaneously, so any snapshot will inevitably be imperfect and may be misaligned with certain underlying assets or benchmarks. |
Accounting for intra-month changes and implementation delaysFrameworks are generally updated intra month and any delays in implementing currency trades can generate undesired risk and returns. This underscores the need for a system that can accurately reflect the fund’s position on a daily basis, alongside relevant benchmarks that identify slippage across pricing and implementation delays. |
Addressing conflicting underlying views on currency outlooksIf multiple managers are taking contradicting positions on similar currency pairs, this would subsequently lead to unnecessary trades, and thus unnecessary costs. These trading costs can be minimized by using synthetic trades or exposures to replicate the desired positions without executing the underlying trades. |
These obstacles can be overcome with a well-designed system and careful consideration, resulting in a holistic picture that can also generate a single snapshot of the total fund at a given date. This snapshot can then be used to generate a list of currency trades required to achieve the desired fund currency exposures.
How can PEARL’s currency overlay capabilities overcome these challenges
With PEARL, all of the above decisions can be configured with its proprietary currency overlay capabilities to allow for an overarching report that doesn’t compromise on detail, as outlined below:
- Single user interface: PEARL enables its users to visualise all layers of a fund’s currency overlay within a single report, while also allowing an user to cross-reference all underlying portfolios within one system.
- Transparent view of underlying trades and portfolios: By loading all underlying data into a single source, users can compare the trades, positions, and portfolios that contribute to overall exposures, and track changes over time with a single click.
- Comparison across hedge policies and base currencies: Multiple hedge policies and base currencies can be analysed for reporting purposes, combining currency overlay reporting with investment decision reporting.
Currency overlay attribution in PEARL
PEARL is designed to help asset owners to analyse and improve currency strategies, especially when these are integrated within complex fund hierarchies. It offers detailed reporting, enabling deeper insights into all decisions that lead from a strategic currency view to actual currency positions.
Currency overlay in PEARL Performance measurement and attribution
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Contact
Elske van de Burgt
Managing Director Investment Performance
Stefano SJ Lee
Managing Director - Asia Pacific
Oliver Henriquez
Sales Director, EMEARelated Insights
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