Deaglo helps a client to reduce their FX costs by 47%, increasing their fund's predicted ROE by 10.5%
Key Takeaways
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Emerging funds find it hard to access competitive rates.
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FX Costs can sometimes be cut dramatically by renegotiating rates.
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Deaglo renegotiated on the client’s behalf and reduced the FX hedging cost by 47%, saving the Client GBP 5,040 annually and improving their fund’s predicted ROE by 10.5%.
Background
Our client, Ballybunion Capital, based in Dublin, Ireland is a boutique asset manager focused on both alternative and traditional asset classes who manage and advise of funds with total capital committed exceeding $4.0bn.
The Ballybunion Insignia Defined Returns Fund (the ‘Client’) was launched in February 2020 and facilitates GBP-denominated investors to deploy EUR into investment opportunities.
To protect foreign investors against currency risk, the Client has a GBP Hedged Share Class and uses a monthly rollover strategy (forwards and swaps), implemented to match the monthly redemption, new subscriptions, and any change in NAV.
Methodology
Subscriptions and redemptions in respect of the hedged currency class are accounted for in the same period.
At subscription, a spot deal is executed converting the subscription amount (in a non-base currency) to the base currency equivalent and then sold forward.
At redemption, the inverse occurs. Any profit and losses arising from such forward contracts (and also any costs incurred in respect of such contracts) are allocated entirely to the relevant hedged currency classes.
Currently, the estimated costs are around GBP 900.00 per roll, and the Client rolls their position with a comfortable credit line.
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The total annual spread costs were then calculated (GBP): 10,800
Once we had determined the impact we worked with both existing and new providers in order to reduce the roll costs.
Results
Through our preferred hedging partners, we could reduce the monthly roll cost by 47%. However, the credit facilities offered wouldn’t be as competitive as the current ones. As the Client wants to avoid any margin calls and/or make fund provisions, the credit facilities are priorities. Therefore, the alternative was to renegotiate the roll spreads with the current broker.
As a result, Deaglo was able to renegotiate the predefined fixed spreads with the current brokers, ensuring that the new spreads would be 47% lower and with the same credit terms.
We were able to showcase the hedging cost savings and the subsequent value this would have for their investors.
The key results were as follows:
Deaglo saved the Client GBP 5,040 on an annual basis and improved their funds' predicted returns by 10.5%, from 8% to 8.8%.
Conclusion
Emerging funds like Ballybunion Insignia Defined Returns Fund usually are charged more than they should be when compared with large funds, which suggests that smaller fund managers find it hard to access competitive rates.
For reducing the FX hedging cost by 47%, Deaglo saved the Client GBP 5,040 on an annual basis and also improved their fund’s predicted ROE by 10.5%.