The foreign exchange (FX) market has seen a less-than-stable period during 2022. One FX-as-a-Service provider, MillTechFX, suggests that FX challenges are set to increase: causing potential issues for fund managers.
MillTechFX has found that FX challenges for fund managers are intensifying. Survey findings suggest that the rising threat of currency movements is negatively impacting investment returns.
The FX-based firm surveyed 250 senior finance-decision makers at fund managers, finding FX exposure from foreign currency assets, management fees, investor capital and at portfolio level has increased in recent years.
Seventy per cent of respondents said that the number of cross-border investments in their firm had increased over the past five years. Sixty-six per cent claimed to have experienced an increase in non-base currency investors in their funds. The vast majority of respondents (93 per cent) stated that FX was significant to their business.
FX poses challenges for fund managers
MillTechFX found that those fund managers currently dedicate significant resources towards working with FX. Over half said they had tasked three or more people with FX-related activities. Despite the intensifying focus on FX, only 15 per cent believe they have the best possible setup. In fact, 33 per cent believe their FX setup to be below average or “worst in class”.
When senior decision makers at fund managers were asked to name their biggest challenge, 35 per cent said fragmented service provision. Other recurring challenges named were:
- Securing credit lines – 34 per cent
- Cost calculation – 33 per cent
- Forecasting exposure – 28 per cent
How can firms address the issues?
Eric Huttman, CEO at MillTechFX, explained some of the survey findings. He said: “Volatility has dominated the FX market so far in 2022, driven by high inflation, rising interest rates and geopolitical issues. As a result, FX risk management has become a strategic priority for fund managers who need to protect their returns against currency moves.
“Despite this threat, fund managers are struggling with a number of issues when it comes to their FX setups, such as best execution, operational inefficiencies, transparency and governance. This has led the vast majority of senior finance decision-makers to explore new technology and seek to embrace digitisation in a bid to streamline operational processes.
“Looking ahead to the rest of 2022 and beyond, we would encourage firms to get the right processes in place now and seek alternative technology-driven solutions that can help them achieve best execution and protect their business during these turbulent times.”
Environmental, social, and governance (ESG) investing was also found to be more important than in previous years in the survey. Fifty-eight per cent of fund managers wanted FX counterparties to have strong ESG credentials. Another 36 per cent said that ESG was an important consideration. Only 6 per cent did not consider ESG when making decisions.