Record Currency Management helps FX investors with EM exposure
The hunger for access to emerging markets is so palpable that some investors are requesting exposure to the currencies, even if the main focus of their underlying investments is quite elsewhere, says Record Currency Management.
The appetite for EM FX comes as the euro, US dollar and yen all struggle under debt-laden economies expecting sluggish growth. For FX of developing economies, it is quite the opposite.
Record’s chief executive James Wood-Collins says clients have asked about adding EM currency strategies on top of hedge and private equity fund portfolios, typically denominated in US dollars.
“Clients are saying they do not mind having some cash risk, but instead of having it in developed market risk, they would rather take EM cash risk, for which they expect to be paid.”
They expect a return from EM FX risk – as it represents a long-term convergence trade – but not necessarily for G7 risk, which is typically unrewarded over time.
Record Currency Management can install a ‘long-developing versus developed markets FX’ position as a ‘portable beta’ above the base investments.
Or investors can allocate to Record’s Emerging Market Currency fund, which does a similar thing using four developed and 18 emerging currencies.
But Wood-Collins said it is crucial to select the right currencies to short – this is not a ‘catch-all’ trade – and not simply go short the denomination of your own liabilities.
“It is a question of which currencies you expect [developing] economic regions to converge with. They would typically be each region’s major trading partner.
Latin American currencies are likely to converge towards parity with the US dollar; emerging Asian currencies tend towards Japan’s yen; and Eastern European currencies with the euro.
When analysing trades, Record Currency Management also targets sufficient market liquidity, the ability to trade using non-deliverable forwards, and “a degree of independence of the central bank, with interest rate targets”.
Record Currency Management has also been discussing with clients the use of FX tools to adjust currency exposures investors take on – maybe unwittingly – in the very popular area of emerging market debt and equities.
“We can take an EM currency strategy, and ‘port’ it onto the duration of developed market currency. We think that is a better way [to invest in EMD] than just buying EM local currency bonds. If you just do that, you will go towards the most liquid bond issues, which are the most indebted countries. With currency markets, you can choose which currencies to be exposed to, and at what size.”