You found an investment opportunity that you think is perfect! You love the potential returns and maybe your financial advisor has said you need diversification or possibly your friend Dave has told you “it's a sure thing”.
The difficulty is, that this opportunity is domiciled in a foreign territory and furthermore denominated in a foreign currency. If you decide you want to move forward whatever your reasons, (we hope it's not solely based on Dave's tip), there are key questions that you need to ask to ensure a successful outcome for a cross border investment.
Is there a foreign share class already?
The simplest way to invest in a foreign fund or opportunity is via a foreign share class or domestic SPV. This is a local structure that allows you as an investor to enter into a partnership with a manager, receive reporting and returns all in your local currency. In some instances, the manager will also offer a hedged share class (more on this later).
However, very few managers offer this ability due to perceived added costs and complexities. That being said, it never hurts to ask because foreign share classes also have become far more simple and cost effective to launch. If you are interested in the manager then it is likely someone else has or will be interested in them at some point. You may be the very catalyst they need, to set up a share class.
At what FX rate am I investing at and who handles the conversion?
If they have a foreign share class in your jurisdiction they will already have a bank account denominated in your local currency. This means the value of the fund +/- any gains/losses/hedging costs in line with the reporting requirements into your home currency will be on them. Simple.
If they don’t have a bank account that can receive in your home currency they will give you the foreign currency account details at their bank. This puts the conversion and tracking on you. The rate you receive from the bank will be the benchmark rate (tip: make sure you check this price, we have seen clients charged as much as 2% on moving funds from one currency to another). You will need this rate to monitor the success of your investment and possibly look to protect your home currency returns through hedging.
What currency am I getting paid back in?
So the investment has succeeded and you are happy with the returns. Now it's time for you to get your money back and bathe in your own glory. Unfortunately, that feeling of self-adulation can be short lived if you haven't defined what currency you are getting paid back in. It can be a costly mistake if you are loaded up with a foreign currency that you then have to convert back into your home currency. Make sure you have had this conversation with the group holding your investment and that you understand whose responsibility it is to convert the currency and whether or not it makes sense to hedge or not.
To hedge or not to hedge?
Hedging is an important component to consider when investing overseas. The last thing you want to happen is for you to invest in a successful project or fund and to have all of your returns wiped out by a negative currency move (it happens).
Hedging allows you to stabilize these returns, albeit at a cost. Hedging costs are determined by the following:
Forward points - The difference between the interest rates of the two currencies you are buying over the period of the investment plus expected market volatility. These costs can actually eradicate the opportunity’s expected gains.
Collateral costs - Deposits are often needed to place these hedges with a bank, the cost of not putting this capital to work has to be factored in to the manager's returns.
Execution costs - Roll costs can add up, especially when rolling contracts monthly. Make sure you know the execution costs being charged by your bank and if possible add another provider into the mix for comparison.
Investing overseas is an exciting and important diversification technique. Just make sure that you ask the right questions, and determine if you need to bring in an FX Specialist to talk to you about your situation. The team at Deaglo has created a suite of services designed to alleviate the concerns when investing overseas. We represent both foreign investors and globally focused managers across all investment types and are always happy to jump on a call.
