Case study. 
Consistent. Differentiated. Verifiable.

Initial situation.
Foreign currency positions without a consistent methodology.

The investor’s foreign currency positions result from the international orientation of the individual asset classes rather than from a deliberate currency decision. While the asset allocation is defined strategically, the currency allocation is largely a by-product of the portfolio structure. The foreign currency risks of the individual investments are, for the most part, managed in isolation and without a consistent methodology.

In addition, the asset classes differ fundamentally in volatility and in their contribution to diversification. In highly volatile segments, currency volatility often plays only a minor role, whereas in a low-volatility asset class the same currency fluctuation can dominate overall performance. The characteristics of the currencies themselves also need to be taken into account – their correlation with the underlying assets as well as their hedging costs or hedging income.

A uniform hedge ratio for the overall portfolio does not do justice to these differences. The client requires a solution that manages currency risk consistently and, at the same time, in a differentiated way – and that makes objectively verifiable what the hedge contributes to portfolio management.

7orca approach.

Basic reference benchmark. Strategy process. Tactical complement.

7orca implements the 7orca Holistic FX Overlay for the client, combining strategic and tactical components. The starting point is the Basic reference benchmark: a deliberately market-independent reference, suitable for institutional investors, which serves as an objective yardstick for the value contribution of ongoing management.

The strategic hedge ratio for each currency is derived in the 7orca FX Strategy Process through a sequence of filters.

• Separate treatment of currencies with structural particularities, such as a peg (exchange rate link) or a geopolitical dimension
• Restriction to positions of economically relevant size
• Ranking of hedging costs and income (carry) relative to one another
• Portfolio optimisation for each currency and asset class
• Volume-weighted aggregation into the strategic hedge ratio for each currency

The strategic process is complemented by 7orca’s tactical risk management, which manages currency risks in a market-adaptive manner. The entire process is repeated in full every quarter. How the individual filters work and which hedge ratios the optimisation produces for different currencies and asset classes is shown in the full case study.

Client benefit.

Management. Process. Governance.

The client has a consistent and transparent approach to currency management that takes account of the differing characteristics of the asset classes. Currency risks are limited more tightly where they account for a significant share of overall risk. In more volatile segments, the diversification contribution of individual currencies is deliberately preserved.

The benefit unfolds on three levels.

1. Management: Currency risk, currency characteristics, diversification effect and hedging costs are considered together. Potential carry premiums are factored into the strategic decision.
2. Process: The strategic orientation is reviewed every quarter on the basis of the prevailing market and portfolio conditions.
3. Governance: The Basic reference benchmark creates an objective basis for communicating the value contribution of the FX Overlay transparently to the management board, investment committee and supervisory bodies.

The 7orca Holistic FX Overlay thus creates a consistent, differentiated and regularly reviewed basis for managing the currencies of a complex multi-asset portfolio.

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