Pension Funds’ Currency Risk Management: Essential Today – Even More So Tomorrow

It has probably never been more important than it is today for pension funds to establish a clearly-defined foreign exchange (FX) risk management strategy to meet the challenges that they will face in tomorrow’s market. For HSBC, a key priority is the proactive development of solutions to help clients address these challenges today and support them as they prepare to navigate tomorrow’s landscape.

In the FX market, this challenge has been intensifying in recent years, chiefly as a by-product of a secular change in pension funds’ asset allocation. A greater focus on asset-liability management underpinning their migration towards fixed income has exposed pension schemes to increased currency risk, says Mark Johnson, Global Head of FX Cash Trading at HSBC in London. It has been estimated that as much as 85% of the performance of an international bond portfolio can be attributed to currency volatility, compared with just 25% for a similarly internationally-diversified equity portfolio1. Intuitively, this suggests that the higher a pension fund’s exposure to international fixed income, the more the portfolio should be hedged against currency volatility.

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