Will FX Management Be Even More Important for Asset Owners Post-Brexit?
Across the globe, mega asset owners, such as USS Investment Management and California State Teachers’ Retirement System (CalSTRS), are closely monitoring the events after the Brexit vote. While some sovereign wealth funds reiterated their belief in investing in the United Kingdom, such as the Kuwait Investment Office and Norges Bank Investment Management (NBIM), other wealth funds are reassessing potential deals and future transactions due to the perceived volatility of the British Pound. Both of these sovereign investors, who have European outposts in London, have skin in the game. Norway’s wealth funds, as of the end of March 2016, had 83.56 billion NOK allocated to UK government debt and 155.929 billion in German sovereign debt. 5.2% of the wealth fund’s fixed income portfolio had exposure to the British Pound and 25.8% to the Euro as of March 31, 2016.
Asset managers are prepping their clients on the impact of currency swings when it comes to returns. “Brexit is the most recent catalyst for foreign currency market volatility. Even though the derivatives market was implying a volatile and binary session over the vote, heightened implied and realized volatility will persist in all markets and asset classes as the ripple effect continues for the foreseeable future. Foreign exchange funds were at the epicenter for the discussion of returns following the vote given the focus on both the volatility and out-right level of the British Pound. Managing underlying FX exposures, particularly the Pound and Euro, in a global mandate of asset classes and investing in primary FX markets will become an increasingly large component of sovereign and pension investing. It is very possible that diverging monetary policy moves and global political risks could lead to a continued move higher in the US Dollar.” Matthew Feldmann, former partner and portfolio manager of Brevan Howard in Geneva, Switzerland, who is working with Scepter Partners to launch their alternative investment fund.
Years of accommodative monetary policy set by Occidental central banking institutions have suppressed volatility across asset classes and markets. However, political events, ongoing turmoil in the Middle East and disease outbreaks have the potential to break the buttons off central bank’s hold on volatility.
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