Managing fund level liquidity

When a fund has a potential variable exposure to multiple currencies with varying levels of volatility, gauging cash liquidity requirements can be challenging.

Chatham Financial’s solution can forecast the potential cash requirements for margin and settlement obligations, and automate the construction of the strategy to manage it.

Step 1: Quantitative evaluation

Our specialist FX quant team have developed a technique whereby you can simulate various scenarios based on the proportion of the fund which may end up being invested in other currencies. There are no limitations to the number of different currencies that the model can tolerate.

Step 2: Determining potential future exposure

A selection of 3-5 simulations will provide a range for the fund’s potential future exposure within varying probabilities (set % or standard deviations). This allows you to confidently plan to accommodate for potential cash requirements arising. This also provides the critical information to use in discussions with banks/counterparties on funding and liquidity requirements.

Step 3: Setting up counterparties

Chatham Financial will assist you in setting up the required number of hedge counterparties, and negotiate the legal and commercial terms of your ISDA/CSA. The key is to negotiate the highest possible threshold for an unsecured facility, providing a buffer from potential margin calls. Chatham negotiates over 3,000 ISDA/CSAs annually and has advised on over 6 trillion USD of hedges since inception. Our scale allows us to negotiate the most competitive terms for our clients. Beyond the thresholds negotiated with your counterparties, an RCF facility can also be negotiated against the uncalled, committed capital of the LPs, up to the point that the fund becomes fully invested and all LP capital is drawn.

Step 4: Design optimal hedging strategy

Design the optimal hedging strategy to align with the objectives of the fund and investor requirements. The key aspect is to determine the hedging policy and decide what the objective of the FX hedging programme is. Are you concerned about the impact of FX volatility on the NAV of the fund? Or is your objective about managing the transactional exposure of distributions? Or are you more concerned about containing the volatility that FX movements have on the IRR of the fund? The design of the strategy will focus on three key variables – tenor, proportion of exposure to be hedged, and instrument choice.

Step 5: Execution

Chatham Financial will negotiate fair and transparent execution and credit charges.

Step 6: Ongoing hedge and liquidity management program

• Establish a liquidity management program, backed up by technology, to forecast liquidity requirements, alongside a live valuation portal for all outstanding derivatives.
• Analytics of the performance of the hedges can also be provided on an ongoing basis. These can include the mark-to-market of the hedges overall or by counterparty and currency, a summary of all the hedges by number of trades, notional and tenor, and risk analysis of the hedges themselves on the fund. We can also prepare bespoke board reports.

We have seen a surge in fund level FX hedging over the last couple of years, with funds looking at overseas assets in a multitude of currencies. A well-managed FX hedging strategy allows the accompanying FX risk to form part of this strategy rather than a hindrance to this strategy. Please contact your Chatham representative to discuss your requirements in more detail.