Unhedged currency exposure gains favour

In the wake of weaker domestic economic conditions, absolute return equity manager K2 Asset Management has announced it has unwound its Australian dollar currency hedging across its K2 Asian Fund and K2 Select International Fund.

K2 Asset Management head of distribution Andrew Hall feels that the Australian dollar may have seen the best of its rally and that an unhedged international fund is likely to outperform a hedged fund.

“While most managers will have their currency exposure fixed as either fully hedged or fully unhedged, K2 actively manages currency exposure,” he said.

“What you’ve found in the past is when you get it right that’s great, as in the past few years, where being fully hedged is fantastic; but we may be going into a period now where an unhedged product will be more favourable and generate better returns.”

K2 Asian Fund and K2 Select International Fund are now 58 per cent and 49 per cent unhedged, having moved from 75 per cent and 71 per cent unhedged last month.

K2 chief investment officer Mark Newman said for the past six months, his investment team has been watching closely for indicators that would support decreasing the levels of Australian dollar hedging that were in place.

The key trigger points that K2 has been reviewing include a weaker Australian domestic economy, slowing Australian inflationary pressures, slowing growth in emerging markets, falling commodity prices, recapitalisation of the US financial sector, and accelerating US economic growth.

According to Newman, the Federal Government and Reserve Bank have both acknowledged weaker domestic economic conditions and a general consensus on interest rates being cut in 2008 has been reached.

“In my view, five out of six potential triggers have eventuated. The only trigger not working is that the US economy is still decelerating and is likely to stay in that mode until the second half of 2009,” Newman said.

“At K2, we believe that all of these factors will place short-term pressure on the [Australian dollar] and that our reduction in [Australian dollar] currency hedging for our Asian and international funds will prove to be timely and add to our performance returns.”