x
FX hedging for private debt funds
Reports & Whitepapers

FX hedging for private debt funds

Jackie Bowie Private Equity April 2019

Foreign exchange hedging is a complex topic. Each hedge has a precise structure that serves a particular need.

This paper is specifically targeted at private debt fund managers and their requirements. It introduces the key sources of FX exposure, some common methods for mitigating FX risks, and some of the challenges and choices that typically arise around that process.

Many debt funds offer finance (loans) in currencies other than the one in which they report or are denominated. As a result, they are inherently exposed to FX risk. At a basic level, any depreciation of the currency in which the asset (loan) is held versus the reporting currency will decrease the asset’s value (and related coupons) in the reporting currency. Most debt fund managers will seek to mitigate this risk via an FX hedging programme. This safeguards returns and restricts the fund’s risk profile purely to the ability of the borrower to repay the loan (credit risk).

However, the construction of such a programme is an intricate task requiring the consideration of a number of variables, not least the inevitable cost of hedging, either in credit consumption or cash. As adopting a tactical approach to mitigating FX risk in an optimal way is not typically part of a manager’s remit, in the below we have outlined the key factors debt managers need to consider.

 

Recent Insights

Reports & Whitepapers
UK Real Estate Debt Market Report
Shripal Shah Real Estate April 2019
Reports & Whitepapers
JCRA 2018 Annual Review
Jackie Bowie JCRA February 2019
Reports & Whitepapers
Social Housing Deal Digest Q3 2018
Duncan Salter Social Housing November 2018

Contact us

If you need hedging or debt advice or would like to speak to the team, please get in touch.