What does a currency overlay manager actually do?

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AcadiFi · Accepted Answer

A currency overlay manager operates a forwards and derivatives program layered on top of an underlying multi-currency portfolio to achieve a currency risk objective separate from the asset selection mandate. Workflow: ```mermaid flowchart LR A[Asset Mgrs
Buy Stocks/Bonds] --> B[Custodian
Holds Positions] B --> C[Overlay Mgr
Sees Exposures] C --> D[Forwards/Options
Adjust Hedges] D --> E[Policy Hedge
Achieved] ``` Underlying managers buy international securities without worrying about currency hedges. The overlay manager receives daily exposure reports, calculates net currency exposures, compares to policy hedge ratios (e.g., 50% on developed, 0% on EM), and executes forwards to close gaps. They manage roll timing, forward points, and collateral. A passive overlay simply matches the policy; an active overlay adds alpha through discretionary or systematic currency signals (carry, value, momentum). A large institutional client like Vesselar Pension might use Overlay Partners Global for $3B of international equity, targeting 50% hedge ratio with a ±5% tolerance band. Benefits: separation of skill sets (equity managers focus on stock selection, currency specialists focus on FX), operational efficiency (one netted book vs. many managers each hedging small exposures), and centralized risk reporting. Costs: overlay fees typically 5-15bps, plus transaction and swap costs. The IPS should govern discretion, tolerance bands, cross-hedging permission (e.g., using EUR forwards to hedge CHF exposure), and the reference hedge benchmark for performance attribution.

What does a currency overlay manager actually do?

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