In 2024, UK fund managers have significantly increased their efforts to hedge against currency fluctuations, with 88% implementing hedging strategies, up from 75% in the previous year. This surge is primarily attributed to heightened volatility in the British pound, which has led to increased hedging costs for 84% of these managers.

Escalating Hedging Costs Amid Pound Volatility

The British pound experienced notable fluctuations in 2024, reaching a low of $1.2296 on April 22 and a high of $1.3384 on September 24. This volatility has made currency risk management more challenging and expensive. The increased costs are partly due to the pricing of forex options, which factor in the probability of future volatility, akin to an insurance premium.

Strategic Adjustments in Hedging Practices

In response to these challenges, fund managers are adjusting their hedging strategies. Approximately 86% are utilizing forex options more frequently, and over half plan to extend the duration of their hedges. Additionally, 33% intend to increase their hedge ratios to secure greater certainty in their investments.

Despite the rising costs, the strong pound has had a positive impact on returns for 89% of fund managers, as it has enhanced their purchasing power for investments priced in dollars. However, only about 6% of managers hedge between 75% and 100% of their portfolios, with the majority hedging between 50% and 75%. The typical hedge duration has also increased to nearly six months, up from less than four months in the previous year.

Geopolitical Tensions and Market Volatility

Geopolitical tensions and market volatility are significant factors influencing these hedging strategies. Events such as global conflicts and political uncertainties have led to heightened currency volatility, prompting fund managers to seek stability through well-structured hedging approaches. This proactive stance is essential to protect returns in turbulent markets.

Technological Integration in FX Strategies

The evolving landscape has also prompted fund managers to integrate advanced technologies into their foreign exchange (FX) strategies. A significant 93% are considering the implementation of artificial intelligence (AI) to enhance efficiency and decision-making processes. Automation of manual processes is a top priority for 34% of respondents, aiming to reduce reliance on traditional methods such as email (42%) and phone (35%) for handling FX transactions.

Challenges and the Path Forward

Fund managers face additional challenges, including tighter lending criteria and higher interest rates or fees, noted by 68% and 88% of respondents, respectively. These pressures, combined with rising hedging costs, are squeezing returns, emphasizing the importance of efficient FX setups and cost-effective strategies. Leveraging technology to drive efficiencies, reviewing legacy relationships, and adopting tools like margin-free hedging can help fund managers maximize returns while protecting against market turbulence.

In conclusion, the increased volatility of the British pound in 2024 has led UK fund managers to enhance their currency hedging strategies, despite the associated rise in costs. By extending hedge durations, increasing hedge ratios, and integrating advanced technologies, these managers aim to navigate the complex financial landscape effectively, ensuring stability and optimized returns for their investment portfolios.