Decoding FX Hedging: What Private Fund Managers Need to Know About Currency Share Classes

To expand global investor appeal, private fund managers — including private equity, debt, infrastructure, and real estate managers — often launch currency share classes. These can remove FX concerns for investors but add complexity and cost for the fund. Here’s a refined roadmap to designing and deploying a currency share class with a robust FX hedging strategy.

1. Should you structure a currency share class or let LPs manage FX themselves?

• Investor convenience vs. simplicity: Some Limited Partners prefer handling FX risk themselves. But many, especially in closed-end funds, value being able to transact in their local currency without FX hassle.

• Centralised management advantage: GPs generally have better oversight of the fund’s cash flow, strategy, and asset currency exposure—making them well suited to manage currency hedging.

• Balancing act: The decision boils down to weighing broader appeal and ease for LPs against operational complexity and cost for the fund. Most GPs take a three-step approach—consider hedging design, monitor costs, and assess liquidity needs.

2. Estimate the cost of running hedging strategies

Currency forwards are typically used, rolled regularly for flexibility. Key cost components include:

• Interest‑rate differentials (roll cost): If the share class currency has lower interest rates than the fund’s base currency, you’ll incur pain on every forward roll. Higher costs usually show up with USD or EUR funds hedging into emerging-market currencies. Consider partial hedging to save on roll costs.

• Transaction fees: Bid-ask spreads add up, especially with frequent rollovers. Options to reduce this include adjusting the hedge ratio, rolling with longer tenors, and negotiating tighter pricing with FX partners.

• Collateral drag: Some counterparties require margin for forward contracts, meaning idle cash or low-yield collateral—an unproductive drag on returns. Mitigate this with shorter tenors, partial hedging, or institutions with lighter collateral requirements.

3. Choose your hedge ratio carefully

How much FX exposure do you cover? This depends on:

• Investment horizon: A long-term view allows short-term currency swings to balance out, supporting lower hedge ratios.

• Portfolio currency mix: If assets naturally offset FX risk (e.g., some FX exposure in portfolio), you may not need to fully hedge. But single-currency portfolios seating a foreign-denominated share class often require full coverage.

• FX market volatility: In turbulent times, a higher hedge ratio can provide peace of mind.

Tailor your hedge ratio to your investors’ tolerance, portfolio structure, and risk appetite.

4. Decide on tenor (roll frequency)

Selecting the right FX forward tenor—or how often you roll hedges—hinges on balancing liquidity, cost, flexibility, and credit needs. Private capital funds typically use one of two tenor strategies:

Short tenors offer liquidity management but require more frequent rebalancing and may cost more. Long tenors reduce transaction frequency but need collateral and limit flexibility.

5. Choose the right counterparty

A hedging program is only as strong as its execution partner. Look for:

6. Bringing it all together

Designing a currency share class FX hedging strategy comes down to:

1. Analyzing costs – rolls, transactions, collateral

2. Fixing your hedge ratio – 0–100%

3. Picking a tenor – short vs. long

4. Choosing the best counterparty

When executed thoughtfully, this structure boosts fund convenience, widens investor access, and keeps FX risk—and cost—well managed.

We’d love to explore how your fund can benefit from a tailor-made currency share class strategy. Reach out to collaborate.

Disclaimer: This is for informational purposes only and does not constitute financial or legal advice.