Navigating Currency Risk: 10 Reasons Why Proactive FX Management is Critical for LPs & GPs

Introduction 

Global investment portfolios today are more exposed to foreign exchange (FX) risks than ever. In the last decade, currency swings ranging from -12% to +26% have had the power to erase entire years of private market returns. As currency volatility looks set to intensify into 2024 and beyond, Limited Partners (LPs) and General Partners (GPs) can no longer afford to treat FX risk as an afterthought. Proactive FX management is now critical.

This article outlines 10 key reasons why active FX risk management must be front and center for investors and fund managers alike.

1. Currency Volatility Directly Impacts Investment Returns

Year-to-year fluctuations in currency values can massively boost or erode an LP’s final returns. For example, a 15% local return could swing to +38% or -8% based solely on a ±20% FX move if unhedged. Such volatility can turn strong investments into poor outcomes and highlights the importance of active FX risk mitigation to preserve value across borders.

2. LPs and GPs Must Share Responsibility for FX Risk Management

Managing currency exposure is no longer just an LP or GP concern—it’s a shared responsibility. LPs must perform due diligence and push for clear hedging strategies, while GPs must offer solutions like hedged share classes or fund-level programs. Both parties need clear communication to avoid surprises or gaps in managing exposures that could hurt returns.

3. Poor Hedging Strategies Can Be as Harmful as No Hedging

Even when FX risk is acknowledged, mistakes in execution can undermine performance. Overpaying for inefficient hedging structures, cash drag from margin requirements, counterparty risk, and passive assumptions of mean-reversion can all severely damage returns. Proactive, optimized hedging is necessary to avoid silent portfolio drains and protect liquidity.

4. Real-World Examples Show the Consequences of FX Mismanagement

Recent years offer clear evidence of the damage FX mismanagement can cause. In 2022, U.S.-based investors saw their European and Asian private equity returns significantly eroded by the surging dollar. Similarly, LPs in emerging markets often suffered currency losses that wiped out local asset gains. GPs, too, have faced IRR mark-downs from failing to hedge properly.

5. Growing LP Demand for Hedged Share Classes is Changing Fund Structures

Sophisticated LPs now frequently request—or even demand—hedged share classes before committing to funds. These structures allow LPs to neutralize FX volatility and receive returns in their home currency. For GPs, offering hedged share classes is becoming a competitive advantage, expanding fundraising reach across multiple geographies.

6. Hedging Costs Have Fallen, Making Risk Management More Accessible

Thanks to narrowing interest rate differentials, market innovation, and rising competition among hedge providers, currency hedging has become more affordable. Tools like Historic Rate Rollovers (HRR) and deferred premium options also minimize cash drag. Lower costs mean that effective FX risk management is now both vital and accessible for funds of all sizes.

7. Dynamic Hedging Strategies Offer Flexibility and Protection

Leading GPs are shifting toward dynamic hedging overlays—adjusting hedge ratios over time, combining forwards and options, and actively balancing risk and cost. Rather than blindly hedging 100% at all times, smart strategies offer downside protection without fully capping potential upside, aligning better with evolving market conditions.

8. Technology Platforms Like Deaglo’s Simplify FX Risk Management

Specialized pre- and post-trade analytics tools are revolutionizing how FX risk is managed. Deaglo’s platform enables GPs and LPs to simulate hedging strategies, monitor exposures in real-time, automate reporting, and make informed decisions dynamically. Transparency, efficiency, and proactive adjustment are now achievable without excessive resource strain.

9. GPs That Master FX Management Gain a Competitive Edge

FX risk management is now part of a GP’s value proposition. During fundraising, GPs that can clearly articulate their hedging policies, back them with analytics, and demonstrate a history of protecting investor returns stand out to cautious LPs. Solid FX governance has become a key differentiator in a crowded private markets landscape.

10. Proactive Currency Hedging Secures Both Returns and Reputation

At its core, effective FX management shields returns from unpredictable shocks and demonstrates a commitment to genuine risk-adjusted performance. It reduces portfolio volatility, reassures investors, and enhances long-term relationships. Funds that hedge smartly are poised not just to survive market turbulence—but to thrive and lead.

Conclusion: Smart FX Risk Management Is Now Essential

Ignoring FX risk is no longer viable. LPs must insist on robust risk controls, and GPs must integrate proactive hedging into their fund operations. With modern technology, lower costs, and a growing body of best practices, effective FX management is more achievable than ever. Those who hedge wisely will not only protect their returns—they will position themselves as leaders in global investing.

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Schedule a personalized demo with our team today to see how Deaglo’s platform empowers LPs and GPs to protect returns, streamline decision-making, and stay ahead of market volatility.

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Want to go deeper?

Read The Dual Challenge for LPs: FX Risk and Asset Insurance for LATAM SMEs to explore how top investors are mitigating risk and maximizing returns across Latin America.

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