European fund managers suffer from a lack of transparency in the FX market, study shows 

By Puja Sharma

• 82% of European fund managers suffer from lack of transparency
• Hedging costs rising for fund managers across Europe, North America and the UK
• More European funds are diversifying FX counterparties than in the UK and North America

A new report from FX-as-a-Service pioneer, MillTechFX, has revealed that 82% of European fund managers suffer from a lack of transparency in the FX market. This is higher than in the UK, where 73% of fund managers believe there is a lack of transparency. 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 European Fund Manager CFO FX Report 2024 is part of MillTechFX’s global research series which 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.

The series reveals that FX hedging costs are rising globally, with 84% of European fund managers, 75% of UK fund managers and 71% 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 on European fund managers, with 89% stating that their returns were affected by EUR volatility and 88% stating FX was significant to their business.

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

The average hedge ratio among European fund managers is 40-49% and 61% of respondents said their hedge ratio was higher than last year, while just 7% said it was lower. The average hedge length was 4.82 months with 52% stating this was longer than last year and just 6% stating it was shorter.

Eric Huttman, CEO at MillTechFX, said, “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.

Looking ahead, 50% of European fund managers are increasing their hedge ratio and 40% are increasing their hedge window, while just 19% are decreasing their hedge ratio and 16% are decreasing their hedge window.

Key findings:

• Europe is leading the global counterparty diversity crusade – A higher percentage of European fund managers are looking to diversify their counterparties (90%) than those in the UK (80%) and North America (81%). This is most likely due to the collapse and subsequent takeover of one of the continent’s largest banks, Credit Suisse.
• ESG is a global priority – We asked fund managers in Europe, the UK and North America, whether ESG credentials affect selected counterparties and the percentage that said they do was very high in each region: 94% in the EU, 96% in North America and 89% in the UK.
• Reliance on manual processes leads to automation drive – 43% of European fund managers use email to instruct financial transactions, and a third (33%) of respondents still use phone calls. 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% of European fund managers are exploring automation. This is higher than in the UK (79%) and North America (78%).

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.

Huttman added, “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.”