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The trouble with currency: Is hedging effective for private equity?

Author: TorreyCove Capital Partners
Date: August 2012

The unfolding euro crisis has brought to the fore an issue that is typically in the background of investors’ thoughts, but rarely rises to the level of concrete action: the question of whether or not to hedge currency exposure. The topic is certainly relevant, as the modern institutional investor generally has significant investments denominated in currencies other than its own.

Yet most investors tend to pay less attention to the inherent currency risks within their portfolios than they do to risks relating to manager execution, strategy drift, and sector/
geographic concentration; or, if they do think about currency risk at all, tend toward inaction.

In this research brief, the matter of currency risk management is explored within a private equity portfolio. We will examine the usual level of exposure to currency volatility, use “real world” data relating to private equity portfolios to simulate the actual practice of hedging and estimate its potential net benefits, lay out some possible options for the management of currency risk, and ultimately provide our conclusion on the matter.

Geography: Global

Type of study: Consulting research

Relevant for: LPs, All GPs, Fund or funds, Associates

Source: TorreyCove Capital Partners

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