Currency Hedging in Alternative Investment Funds

In an environment marked by structural currency volatility, managing exchange rate risk is key to preserving investment value. At AltamarCAM, our hedging approach seeks to protect returns while maintaining flexibility and cost efficiency—balancing discipline with adaptability across different market cycles.

The impact of currency movements varies significantly across asset classes. Long-term strategies such as Private Equity tend to naturally mitigate exchange rate effects over time, while shorter-duration or tighter-margin assets require more comprehensive hedging. Our goal is to align protection with the nature and expected return of each strategy, ensuring sustainable value creation for investors.

Preservation of investment value constitutes one of the fundamental pillars of AltamarCAM’ s investment policy. Among the external factors that may influence portfolio performance, currency risk stands out as one of the considerations that must be appropriately assessed and managed as it could affect the investments value. In this regard, long-term currency hedging strategies often entail significant costs and may not always prove fully efficient in achieving the desired objectives. Consequently, at AltamarCAM we implement a tactical and flexible currency management approach, tailored to the specific characteristics of each asset, with the aim of safeguarding returns and mitigating volatility.

In the context of private market investments, where investment and divestment horizons are typically extended, currency risk tends to be mitigated over time as exchange rates normalize between entry and exit points, thereby reducing the overall impact of currency movements on portfolio valuations. Throughout our firm’s history, this mitigating effect inherent in long-term investment has been consistently observed across our portfolios. As an illustration, within the Private Equity segment—where certain funds maintain foreign currency exposures exceeding 60%—the overall impact on portfolio valuations has generally remained within a range of –3% to +3% (as of June 30, 2025, among the principal currencies to which we are exposed), resulting in a very limited effect on the final return to investors.

Currency Exposure and Its Impact on the Private Equity Portfolio

Hedging policy by asset class and strategy

Our currency hedging policy is designed to align with the expected return, investment horizon, and level of currency risk associated with each investment strategy. The following strategies are primarily employed, generally using forward contracts as the main hedging instrument:

1. Tactical Hedges:
   In general terms, exposure to currencies other than the euro typically ranges between 60% and 90% of total exposure. Hedges are activated when the euro exchange rate against those currencies falls below the historical average of the rates at which fund transactions have been executed during their investment periods. We implement hedges on the estimated capital distributions expected over the next 18 months, aiming to protect the value of our investments at a reasonable cost.
2. Full Hedging of the Invested Amount:
   In strategies with narrower expected returns, where we aim to minimize exchange rate volatility, we follow a full-hedge approach. In these cases, the hedge is applied to 100% of the invested or disbursed capital. This enables more effective management of expected returns by reducing the potential impact of currency fluctuations on overall performance.

Another important factor when determining the hedging strategy is the type of investment, particularly whether it is made through the primary market, secondary market, or co-investments.

1. Primary Market Investments:
   These are investments where a commitment is made, and capital calls are typically executed over a period of three to five years. In this type of investment, currency risk tends to be mitigated over time, as disbursements occur over several years, resulting in a weighted average exchange rate. The same occurs on the distribution side, where proceeds are usually received over more than five years, further smoothing exchange rate effects through time-weighted averaging.
2. Secondary Market Investments:
   These investments generally involve larger disbursements over shorter periods compared to primary commitments. As a result, currency risk has a more immediate impact. In such cases, hedging becomes more relevant, as our objective is to reduce return volatility by minimizing currency effects.
3. Co-Investments:
   Similar to secondary investments, co-investments involve the immediate disbursement of capital at the time of investment. In these cases, hedging plays an especially critical role, as divestments typically occur in a single transaction, meaning that a single exchange rate is applied with no possibility of averaging effects as seen in primary or secondary investments, where exits are gradual.

By way of illustration, the following section presents two scenarios demonstrating the effect of hedging in the event of both an appreciation and a depreciation of the U.S. dollar against the euro, using a base value of 100:

Market outlook

The performance of the U.S. dollar (USD) and the British pound (GBP) against the euro (EUR) over the past 25 years has exhibited high structural volatility, with the average exchange rates standing at approximately 1.19 for the USD/EUR and 0.79 for the GBP/EUR. This underscores the importance of maintaining a flexible hedging policy—one that balances discipline with adaptability to effectively navigate evolving currency dynamics.

Historical evolution of the Euro/USD (2000-2025)

Historical evolution of the Euro/GBP (2000-2025)

Future outlook

The short and medium-term evolution of major currencies will continue to be shaped by the monetary policies of the main central banks—notably the Federal Reserve and the European Central Bank—as well as by interest rate dynamics and the political environment in the United States and the United Kingdom. In this context, AltamarCAM’s strategy will remain focused on implementing tactical, selective, and asset-specific hedging, with the objective of preserving returns while avoiding excessive costs associated with long-term hedging instruments.

Conclusion

Currency hedging represents an additional tool for value preservation within alternative investment funds. AltamarCAM’s policy combines prudence, flexibility, and disciplined execution, trying to ensure that the management of currency risk does not compromise the return objectives of our investors.

• By AltamarCAM Partners
• 02/12/2025
• Currency Hedging in Alternative Investment Funds