Improving Currency Hedging Outcomes: New Change's Data-Driven Approach

Background

In my career, I have led the currency departments at some of the largest asset managers in the world. This experience provided me with invaluable insights into the mechanisms and strategies behind currency management. A key challenge consistently pondered was how to improve client outcomes. Modern portfolio theory has long demonstrated that investment constraints impede performance, encouraging a more "unconstrained" approach.

During my tenure overseeing these teams, significant battles were fought and won to include a wider array of currency pairs in mandates, increase flexibility in position sizes, and diversify the instruments used. The focus in currency hedging was not on self-imposed constraints, but on trading frequency, not timing or price. It is well understood that more frequent trading keeps portfolios closer to their desired hedge ratio, albeit at the cost of increased trading expenses. Typically, a monthly hedging cycle is chosen at the commencement of an investment mandate as a reasonable compromise between portfolio drift and transaction costs (T-costs).

The Problem

Operational convenience often dictates that month-end is the preferred time for asset-rebalancing, cash flows, and currency hedging. However, recognizing the structural imbalances caused by the dominance of US dollar-denominated investments, some managers have shifted their roll-dates to mid-month, aiming for a more balanced market. Despite these efforts, the focus of currency management frequently shifts to operational convenience and habit rather than optimal performance.

Price considerations beyond who is offering the best price now in most hedging approaches are minimal and, beyond avoiding month-end biases, are rarely accounted for. An optimal strategy would dynamically balance tracked portfolio drift—how far a portfolio has moved from its desired hedge ratio—against trading opportunities presented by the forward curve's shape and volatility.

Data Availability and Its Impact

One major obstacle to the adoption of theoretically optimal hedging strategies is the poor availability of granular data. While data for standard tenors (such as 1-week, 2-week, and 1-month) exists, the necessary granularity for intermediate dates—the so-called "broken dates"—is often missing, replaced by straight-line estimates that offer little practical insight. Consequently, standard hedging practices reflect data deficiencies and operational convenience rather than optimal investment strategies.

New Change's Solution

Asset management companies are now investing significantly in data infrastructure to better manage and profitably utilize their proprietary data. However, the critical missing piece remains the availability of accurate and unbiased FX forward data for all dates, which is essential for precise tracking, modelling, and optimization.

At New Change, our frustration with the unavailability of such data has driven our motivation to develop a solution. Since assuming the CEO position, I have focused on collaborating with a dedicated team to make this data available to the market. NCFX Forwards365™, our flagship initiative in this space, provides comprehensive and transparent FX forward data, shedding light on previously obscure market segments.

NCFX Forwards365™ provides FX forward data for each day out for a year, calculated as a market maker calculates rather than simply with a straight line between pillar dates. This means points per day incorporate details like supply and demand at month end, impact from central bank meetings, and more.

Implementation and Results

NCFX Forwards365™ empowers asset managers to make informed, optimal decisions by offering granular, real-time data. This innovation breaks free from the constraints of traditional, sub-optimal methods. Our approach has seen us work closely with clients and partners to enhance service quality for all stakeholders, particularly those with potentially poorly hedged pensions.

While there will be resistance from those benefiting from the status quo, we are optimistic that technological advancements and superior data can improve market efficiency and lead to better currency hedging decisions. NCFX Forwards365™ stands at the forefront of this transformation, ensuring that asset managers no longer must choose between operational convenience and optimal performance. The journey of NCFX Forwards365™ demonstrates that with the right tools and strategies, the financial industry can overcome traditional constraints and achieve greater efficiency and effectiveness.