Deaglo helps a client to reduce their FX costs by 47%, increasing their fund's predicted ROE by 10.5%
The Client
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.
Key Takeaways
Emerging funds find it hard to access competitive rates. FX Costs can sometimes be cut dramatically by renegotiating rates.
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%.
Methodolgy
- Subscription and Redemption Accounting
Subscriptions and redemptions for the hedged currency class are recorded within the same accounting period to ensure consistent and accurate recognition of currency-related transactions.
- Hedging Process
At subscription, amounts received in a non-base currency are converted to the base currency via a spot transaction and then sold forward to hedge currency exposure. The process is reversed upon redemption.
- Allocation of Hedging Results
All gains, losses, and costs arising from forward contracts are fully allocated to the relevant hedged currency classes, ensuring costs are borne only by those investors.
- Cost Review and Optimization
Hedge roll costs were estimated at approximately GBP 900 per roll, resulting in annual spread costs of GBP 10,800. Following this assessment, discussions with existing and new providers focused on reducing these costs.
Results
- Alternative Hedging Review
Through preferred hedging partners, a potential 47% reduction in monthly roll costs was identified. However, the associated credit facilities were less competitive than the client’s existing arrangements, increasing the risk of margin calls or the need for fund provisions.
- Client Priority: Credit Facilities
As maintaining strong credit terms was a priority for the client, avoiding margin calls took precedence over switching providers. This led to the decision to pursue cost improvements with the existing broker rather than changing counterparties.
- Renegotiation Outcome
Deaglo successfully renegotiated the predefined fixed spreads with the current brokers, achieving a 47% reduction in roll spreads while preserving the same credit terms and facilities.
- Financial Impact and Investor Value
The renegotiation resulted in annual savings of GBP 5,040 for the client and improved the funds’ projected returns by 10.5%, increasing expected performance from 8.0% to 8.8%, delivering clear value to investors.
