Fonds De Reserve Pour Les Retraites, the €35.7 billion ($49 billion) French sovereign wealth fund, is looking for an overlay manager who will be charged with advising and informing the fund on foreign exchange risk and implementation of the risk exposure.
The fund is split between the performance assets (about 40.6 per cent) made up of 33.3 per cent equities, 3.8 per cent commodities, and 3.5 per cent real estate; and fixed income and money market investments, of cash, inflation-linked bonds, international bonds, and euro zone bonds, which make up 59.4 per cent. It has 46 funds manager relationships across 15 different asset classes
When the fund set its initial strategic asset allocation, it didn’t see investments in currencies as a source of sustainable return for the risk taken, rather it opted to hedge a large portion of its international exposure.
It set exposure to foreign exchange rates in the FRR’s portfolio (25 per cent of its assets, two thirds in dollars, 11 currencies in the benchmark) at 90 per cent hedged, and it was decided that this ratio must not fall below 80 per cent.
Hedging the currency risk is a two-step process: the first step consists of passively managing the currency risk as the FRR steps up its investment program. The hedge ratio is set at 90 per cent for each currency, adjusted monthly on the basis of the currency structure in the strategic benchmark. Although it is passive, currency risk management may be adjusted if the FRR detects a clear risk for any particular currency, in which case the hedge ratio would be temporarily modified.
The second step will involve a shift to active management of the currency risk: the ratio will shift actively within a range of 80-100 per cent, based on market trends or expectation scenarios, and the responsibility for these shifts will be placed entirely on the overlay manager.
The overlay manager also implements the tactical allocation decisions passively, through the use of simple derivatives.