FX trends & challenges facing Swiss fund managers

In our latest blog, we take a deep dive into what our research uncovered about fund managers in Switzerland including their FX exposure, pain points, hedging strategies and priorities. 

Switzerland’s relationship with the euro

Following a referendum in 1992, the Swiss public decided against joining the European Economic Area (EEA), opting to keep using the Swiss franc as opposed to the euro.

However, in September 2011 the Swiss National Bank (SNB) pegged the Swiss franc to the euro at a rate of 1.20 francs to 1 euro. Less than four years later, in January 2015, the SNB announced it was going to scrap its currency peg to the euro, causing the Swiss franc to immediately skyrocket by 20%.

In the years that have followed this shock decision, the Swiss franc weakened back to 1.20 euro in 2018 completing a full reversal, before gradually strengthening to an eight-year high of 0.94 euro in December 2023, amidst bets that the European Central Bank would cut rates before the SNB.

It’s clear that currency management in Switzerland has always been an important consideration.

FX importance for Swiss fund managers

Fund managers in Switzerland consider FX to be of greater importance than the rest of Europe with 97% saying FX was significant to their business compared to the European average of 88%.

Our research also found that the vast majority of fund managers in Switzerland (94%) had their returns affected by euro volatility, which was higher than the European average of 89%.

Further to this, 50-59% of Swiss fund managers’ business is exposed to foreign currencies, highlighting the significance of FX to their business. 

Reliance on manual processes leading to greater automation interest

Our research revealed there is still a heavy reliance on manual FX execution in Switzerland, with 50% of fund managers relying on email to instruct financial transactions and 38% reporting it is the most challenging aspect of their FX operations.

This process is a huge drain on human capital, with our research finding that on average, fund managers in Switzerland have nearly three team members tasked with FX activities and spend almost three days per week on FX-related matters.

Fortunately, the overwhelming majority of Swiss fund managers (91%) are looking into new technology and platforms to automate their FX operations. This puts them ahead of the rest of European fund managers, 87% of which are exploring automation. 

Swiss fund managers struggle with transparency

We asked fund managers if they thought there was a lack of transparency in the FX market and the answer was a resounding yes, with over four-fifths of respondents saying so.  

Switzerland certainly didn’t buck this trend, with 94% of Swiss fund managers stating they thought there was a lack of transparency in the FX market.

This was backed up by the fact that after manual processes, our research found that the two biggest challenges for Swiss fund managers’ FX operations are getting comparative quotes (31%) and forecasting and cost calculation (28%).

Swiss hedging trends

With a high proportion of respondents in Switzerland (94%) saying that their returns had been impacted by EUR volatility, the same share also hedge their forecastable currency risk (94%). Of the Swiss fund managers that don’t, 100% responded saying that they are now considering hedging given market volatility.

17% of fund managers in Switzerland reported that they hedge all of their FX exposure, with 67% stating that they hedge a large proportion. This is in line with the rest of Europe, which reported 17% and 60% respectively. Swiss fund managers reported one of the highest current hedge ratios with 50-59% and 70% stated their hedge ratio is higher than the previous year.

Interestingly, this is higher than any other European country, with 61% of European fund managers reporting their hedge ratio increased this year compared to the previous.

Hedging costs for fund managers across Europe rose in the past 12 months and this is the same case in Switzerland. Overall, 84% of European fund managers said their hedging costs had risen, rising to 90% in Switzerland.

Counterparty risk in Switzerland

The banking crisis in 2023 sent shockwaves throughout the finance industry. In Switzerland, a globally systemic bank stood on the brink, for the first time since Lehman Brothers and in the US, three regional and specialised banks failed in rapid sequence. 

Whilst the banking sector has seemingly stabilised since the turmoil of Spring 2023, many senior finance decision-makers at European fund managers are taking lessons from the crisis on board. 

Our research found that 90% of fund managers are looking to diversify their FX counterparties. Perhaps unsurprisingly given it was the home of Credit Suisse, Switzerland had one of the highest percentages of fund managers exploring diversification at 94%.

ESG is a priority 

Driven by increased pressure from investors, governments and consumers, ESG criteria are now central to the decision-making process for many fund managers. Our survey found that the trend has also begun to play an increasingly important role in selecting FX counterparties and service providers. 

94% of senior finance decision-makers at European fund managers said that ESG credentials impact their selection of FX counterparties, while 56% said they have a big impact.  

Switzerland matches this general trend, with 94% of fund managers responding that ESG credentials impact their selection of FX counterparties and 63% saying it impacts their decision to a great extent. 

FX should be a key priority for Swiss fund managers in 2024 

With uncertainty set to stay, we believe the management of FX currency risk should be considered a top priority for Swiss fund managers in the year ahead. 

Fortunately, there are several ways they can improve their FX risk management infrastructure and protect their returns in these uncertain times:  

Transaction cost analysis (TCA) – TCA was specifically created to highlight hidden costs and enables fund managers to understand how much they are being charged for the execution of their FX transactions. Ongoing, quarterly TCA from an independent TCA provider can be embedded as a new operational practice to ensure consistent FX execution performance.  

Comparing the market – We believe that fund managers should seek alternatives to the traditional single bank-based approach. Instead, they should look for solutions that enable them access to live rates from multiple banks and execute at the best rate, all whilst reducing the operational burden traditionally associated with this kind of market access.  

Outsourcing – There is a growing recognition that outsourcing does not necessarily mean a loss of control, less transparency or reduced quality of FX activities, but when using the right partner outsourcing can improve transparency and execution quality. Outsourcing can therefore enable fund managers to dedicate more time to core business matters, which is all the more important amidst inflationary and volatility pressures.  

Strong governance – FX is one of the largest and most liquid markets in the world, but also one of the most complex. Setting up and onboarding new FX counterparties, centralising price discovery and navigating the post-execution phase require a team of people and often have their own complications. Harnessing solutions which can enhance transparency and governance can help fund managers improve the cost, quality and transparency of their FX execution.  

Diversification of liquidity providers – Recent events in the banking sector show that reliance on one or two counterparties can be an extremely risky strategy, as the loss of a major FX counterparty could render firms unable to trade. We believe fund managers should begin exploring technology-driven alternatives to the single bank-based approach that enable them to transact in FX in a way that addresses risks associated with a single point of failure. 

Automation – Despite the rising threat of currency movements, many fund managers continue to rely on manual processes like phone and email to execute FX trades which may make it harder to mitigate the impact of currency volatility. Harnessing automated solutions can offer end-to-end workflow, greater transparency and faster onboarding, helping finance departments streamline their FX functions. 

How MillTechFX can help 

MillTechFX is an FX-as-a-Service (FXaaS) pioneer that enables fund managers to access multi-bank FX rates via an independent marketplace.   

MillTechFX’s market access, pricing power and operational resource enable it to deliver a tech-enabled integrated solution that delivers transparency, cost reduction and operational burden reduction for senior finance decision-makers at fund managers.  

It is end-to-end at no additional cost, offering easy and quick onboarding, multi-bank best execution and hedging management, and connectivity into clients’ bank accounts, internal systems, administrators or custodians.  

To speak to us directly please reach out to our EU sales team on eusalesdesk@milltechfx.com, phone number +33 1 88 24 98 90, or request a free TCA here. 

Find out more at https://www.milltechfx.com  

This blog post examines & refers to the data and results of a survey by Censuswide on MillTechFX’s behalf conducted between 10 November and 27 November 2023 based on a survey of 250 senior finance decision-makers at mid-sized asset management firms in Europe (described as those with assets under management ranging from €500m to €20b). The full survey can be found here.