The intensifying FX challenges for Nordic fund managers

MillTechFX recently surveyed 250 fund managers and senior finance decision makers across Europe to provide a window into their FX resourcing, risk management and hedging strategies and views on trends such as automation and ESG and it revealed some fascinating trends and geographic differences.  

In this blog, we take a deep dive into what our research uncovered about fund managers in the Nordic countries of Denmark and Sweden, including their FX exposure, pain points, hedging strategies and priorities. 

Recent currency history in Denmark and Sweden 

 In the early 2000's, both Denmark and Sweden refused to adopt the euro after national referendums, choosing to maintain free-floating currencies.  

Denmark, participating in the Exchange Rate Mechanism II (ERM II), is required to trade within 2.25% either side of a specified rate of 1 euro equal to 7.46038 krone. Polls show that the majority of the Danish population opposes joining the Eurozone, given the zone’s debt crisis.  

In Sweden, however, opposition to the eurozone has gradually diminished given the weakening of the Swedish krona, which is roughly 20% undervalued against the euro as of the summer of 2023. This has led to the rise in costs of imported goods from the Eurozone which, if the imports are intermediate goods, can have unintended consequences on future exports.  

Importance of FX to the Nordics 

When asked how significant foreign exchange was to their businesses, fund managers in Denmark and Sweden responded saying that FX was of less importance than the rest of the European pack (88%), coming in at 67% and 63% respectively.  

The slight majority is even more surprising when it comes to the impact EUR volatility had on Danish and Swedish fund managers’ returns. In Denmark, 83% of fund managers said FX had an impact on their returns, while in Sweden this rose to 90%.  

Further, 34.84% of Swedish fund managers and 47.96% of Danish fund managers’ business on average is exposed to foreign currencies, highlighting the significance of FX to their business.

Reliance on manual processes driving automation exploration  

Our research revealed there is still a reliance on manual FX execution, especially in Denmark where 40% of fund managers rely on phone calls to instruct financial transactions, while 43.33% rely on email. In Sweden, it’s still a problem with 30% relying on phone calls and 30% on email. 

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

The good news is that the vast majority of fund managers in Denmark (83%) and Sweden (70%) are looking into automating their FX operations. However, they are still lagging behind the rest of European fund managers, 87% of which are exploring automation.  

Nordic fund managers are struggling with transparency and other FX pain points 

We asked EU 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.  

In the Nordics, it was a bit more mixed with a definitive 97% of Danish fund managers struggling with FX transparency, compared to a below-average 73% in Sweden. That said, they both represent healthy majorities in both countries, potentially implying that hidden costs and an inability to compare the market are hampering Nordic fund managers when it comes to FX. 

Another critical pain point for both Swedish and Danish fund managers was managing multiple providers, with both reporting this as the most challenging aspect of their FX operations. Getting comparative quotes was the next most difficult task for fund managers, with 37% in Sweden and 30% in Denmark selecting this as a key issue.  

Hedging against volatility 

Despite a high proportion of respondents in Sweden (90%) saying that their returns had been impacted by EUR volatility, only 63% hedge their FX risk, compared to 93% in Denmark. 100% of fund managers that don’t hedge their FX risk in Denmark and Sweden are now considering doing so given market volatility. 

Sweden had the highest percentage of fund managers hedging all of their FX exposure (47%), while Denmark was above average at 18%. In addition, both Sweden and Denmark had the lowest proportion of fund managers who said that their hedge ratios were higher (net) than the previous year: 47% and 54% respectively.  

Interestingly, the two countries had the lowest proportion of fund managers increasing their hedge ratios: 23% in Sweden and 40% in Denmark. This is compared with an average across the surveyed European countries of 50%.  

Hedging costs for fund managers across Europe rose in the past 12 months and this is the same case in Denmark and Sweden albeit less ubiquitously. Overall, 84% of European fund managers said their hedging costs had risen, compared to 63% and 68% in Sweden and Denmark respectively, the two lowest of the countries surveyed. 

Counterparty diversity in the Nordics 

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 the Spring of 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. Sweden had the highest percentage of fund managers exploring diversification (97%), while Denmark came in below average at 83%. 

ESG is a priority 

Driven by 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.  

In Sweden, 93% of fund managers said that ESG credentials have an impact, higher than Denmark (90%), while 60% said they have a big impact, over two times more than in Denmark (23%). 

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

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