KUALA LUMPUR: With more institutional investors in Asia Pacific investing globally, there is an urgent need for them to consider currency risk exposure to minimise risk and ensure sustainable returns, according to Overlay Asset Management head of currency overlay for Asia Pacific Dr Hai Xin.
Overlay Asset Management is the currency management specialist of BNP Paribas Investment Partners, the asset management arm of BNP Paribas Group.
Hai said instead of currency hedging, which is usually piecemeal and ad hoc, the better approach for investors would be to undertake currency overlay approach which specifically allowed them, via their specialist currency manager, to take control of their decisions independently.
“Currency overlay is essentially systematic hedging, which allows an investor to take control of currency decisions independently of other asset classes (bonds, equities) at the asset allocation level. Basically, this approach separates the decision made on currencies from that on bonds and equities. This investment technique, which was started in the United States in the 1980s and later in Europe in the 90s, is now gaining popularity in Asia Pacific,” he told StarBiz.
According to Hai, one of the reasons why regional investors were investing globally was because the asset base in the region was growing and people were looking at diversifying their investment portfolio, hence greater currency risk exposure.
Another reason for them to look at their currency risk more closely was because most of their foreign investments were made in US dollars and many of them were concerned of the long-term prospect of the greenback, he added.
When the local currency appreciated, he said, investors holding the dollar-denominated assets would suffer currency losses.
Hai added that investors might need currency overlay programmes to ascertain management of currency risk effectively.
With currency trading being liberalised and ample liquidity in the currency market, Hai foresees more flexibility as well as lower costs for investors to opt for currency overlay programmes to control their risks.
Set up in 1998, Overlay Asset Management currently manages about US$20bil in assets mainly from institutional investors, a third of which are from the Asia Pacific.
With more pension funds investing abroad, Hai expects greater demand for currency overlay services.
According to Hai, the currency overlay industry had been successful in reducing total portfolio risk of 2% to 4% (15% to 18% for global equities and 6% to 8% for global bonds).