Hedging currency exposure for multiple share classes
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Hedging currency exposure for multiple share classes

With the recent FSA authorisation of currency hedging for multiple share classes, UK fund managers face further opportunities to expand the distribution of sterling based funds. Hugo Cox examines the operational challenges.

This article appears courtesy of Global Investor.

Here's  an opportunity for European pension funds : they, and other foreign investors, can now delegate responsibility for hedging currency exposure to their UK fund manager, simplifying their portfolio management  and reducing hedging costs. It is unclear how quickly demand from this sector will pick up but share class hedging creates considerable challenges for investment managers, for which they appear largely unprepared. Instead service providers must create solutions to automate the complex operational processes which underpin the task, thereby relieving mangers of the responsibility for day-to-day hedging.

The provision for hedging of multiple share class was among a number amendments to the New Collective Investment Schemes  (COLL) source book, which came into effect at the beginning of February. It provides sponsors of a UK domiciled, sterling-based OEIC (Open-Ended Investment Company), the ability to extend fund distribution to investors with a different base currency while protecting the new investors against adverse currency effects.

 "By launching hedged share classes in currencies other than the base currency of the fund, managers are providing investors access to sterling returns while investing in a non-sterling share class," explains James Tucker of Henderson Global Investors.

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