In every investment category, whether traditional or alternative, there are various risks involved. Some of the risks involved in alternative investments include liquidity risk, operational risk, regulatory risk, market risk, and geopolitical risk, among others. One of the most unnoticed risks in alternative investments is currency risk. Currency risk is the reduction of the value of an investment, due to unforeseeable or adverse movements in foreign currencies. Also known as exchange rate risk, currency risk occurs due to various factors – including conversion from one currency to another (translation risk), drop in exchange rates during international transactions (transaction risk), interest rate differentials, and economic and geopolitical changes, among other factors. In such a scenario, it becomes essential to mitigate currency risk. Below is Hedonova’s expertly mapped pathway for navigating currency risk in alternative investments.
Choosing currency forward contracts, options, ETFs
Some of the most popular and time-tested ways of hedging currency risk are taking the help of tools like currency forward contracts, currency options, and currency exchange-traded funds (ETFs). As its name suggests, currency forward contracts are contractual agreements that lock the exchange rate of a specific transaction. The contract locks the exchange of currency slated in the future at a rate predetermined in the present. This ensures you’re protected from the depreciation of the currency’s value if it so happens in the future. In exchange options, you and another party can agree to buy or sell a specific currency at a pre-fixed exchange rate in the future. Buying the currency options beforehand can safeguard you against unpredictable currency fluctuations, and selling the options can generate profitable income. Currency ETFs track the performance of currency pairs (such as the US dollar/ British pound) in the foreign exchange market so that investors gain exposure to the currency markets and benefit from rising and falling exchange rates. These tools can offset any currency risk attached to investments.
Considering natural hedging with hedge funds
Natural hedging techniques are one of the best ways to hedge currency risk in alternative investments. For instance, if you’re holding an alternative asset/ investment where you reside and generate income in the same local currency as yours, you get an automatic hedge against currency risk. For investors managed by Hedonova, automatic risk mitigation is an assumed responsibility. Hedonova naturally hedges currency risk for its investors – whether US or non-US-based. The company employs various risk management and strategy techniques to minimize currency risk. For non-US investors, it mitigates the currency risk associated with their local currency appreciating it against the current value of the US dollar. At the same time, it ensures you gain access to alternative investments across borders, currencies, and asset classes.
Carrying consistent currency risk assessment for dynamic hedging
To avoid the impact of currency risk, it is necessary to reassess your investment portfolio on a timely basis. While it is great to be proactive and involved in the management of your own investments, it is advisable to rely on a certified financial advisory company or professional, allowing you to invest safely after they do due diligence on your behalf. Alternative investment companies like Hedonova help you make informed decisions regarding monetary hedging by providing insights into the latest market trends, monitoring economic, geopolitical, and regulatory events, conducting risk analysis, studying central bank policies, and adjusting your hedging strategies in response to evolving factors. Additionally, because the alternative investment landscape is complex and has scarce relevant information available – Hedonova helps you equip yourself with the latest know-how and trends to aid you in making informed investment decisions.
If left unchecked, currency risk can have a considerable impact on your investment portfolio and overall earnings. To ensure maximum ROI and lower currency risk, it’s beneficial to use effective currency risk management strategies as outlined in this article.
This article is authored by Alexander Cavendish, Chief Executive Officer, Hedonova
For more information on Hedonova, visit: https://hedonova.io/