How GPF, AIMCo deploy currency hedging to protect portfolios

The Government Pension Fund of Thailand and Canada’s Alberta Investment Management Corporation are rethinking hedging strategies for their US dollar assets amid high interest rates.
How GPF, AIMCo deploy currency hedging to protect portfolios

The Government Pension Fund of Thailand (GPF) and Canada’s Alberta Investment Management Corporation (AIMCo) said it is a challenge to adapt their currency hedging strategies to the rising rate environment.

Investment executives from both pension funds are conducting active currency risk management and adjustment to ensure meaningful risk-adjusted returns for their portfolios.

“We have a 60% allocation to offshore assets. I don't think we would go beyond 60. I think the major risks in our portfolio is currency risks,” Arsa Indaravijaya, GPF’s chief investment officer told a panel discussion at AsianInvestor’s 13th Southeast Asia Institutional Investment Forum in Singapore on Wednesday, November 22.

Arsa Indaravijaya, GPF

Indaravijaya noted that GPF’s investments in global bonds are required to hedge at least 85%. Given the rate differential between the US and Thailand, the hedging cost is around 2.5% to 3%, which effectively erodes the dollar return by three percentage points if they buy a total-return global bond.

“It is really difficult,” Indaravijaya said.

However, in risky asset investments, he said GPF’s benchmark of currency is unhedged, which makes sense to the pension fund over a three-to-five-year horizon, as the correlation between global equities versus the spot exchange rate tends to complement and lower the volatility of the portfolio.

“We would probably be sticking around with semi-active, leveraging on the hedge ratio, deviating from long-term currency benchmark,” he said.

GPF managed Bt$470 billion ($13 billion) in assets as of the end of September 2023. Within its 60% overseas exposure, dollar assets are the majority.

“That helps when the growth differentiates, when US job market and retail sales have been very strong and emerging market economies have done relatively poorer than those in the developed markets,” Indaravijaya said.

Hence, GPF is staying long on the US dollar to hedge the overall portfolio, or even geopolitical risks, as he noted a strong US dollar has had limited impact on company earnings.

“So longing US dollar would help us shield our portfolio from volatility in the risky assets,” he added.


Similarly, currency hedging has been an ongoing discussion for AIMCo, whose client base is Canadian pension funds. It typically hedges 100% for foreign exchange risks, which wouldn’t cost too much when inflation rate was low.

“But now with market volatility, the margins that we need to put up for hedges are quite expensive. So that hampers our ability on the investment side, because it takes a lot of cash away from deploying,” said another panellist Jason Munsch, AIMCo’s managing director, infrastructure, and head of external partnerships.

Jason Munsch, AIMCo


AIMCo opened its first Asian office in Singapore in September this year, looking at diversifying its C$164 billion ($120 billion) portfolio into this part of the world. Currently, 75% of its investments are in North America.

“We are looking at how best to rethink our hedging strategy to minimise those cash traps,” Munsch said, noting that it could include looking at risky assets in emerging economies without hedging similar to GPF, but the currency volatilities in those markets could be another concern.

For new investment mandates, AIMCo still takes a prudent approach to hedging currency risk over a one-year period.

In manager selection, it continues to assess managers based on how risk is incorporated within each asset class. Particularly now during volatile and uncertain markets with geopolitical risks, managers are evaluated on whether their strategies can withstand such conditions, Munsch said.

He also added that while currency fluctuations are not yet impacting investment decisions, AIMCo must ensure it is not constrained by cash when margin calls occur in momemts of high volatility, so that it can respond adequately in such situations. 

Meanwhile, AIMCo is still evaluating where best to deploy capital across Asia given the nuances of each market.

In infrastructure, it sees potential opportunities in energy transition and digital infrastructure, such as digital data centre driven by artificial intelligence development. It aims to leverage partnership in the region to access them.

Meanwhile, with potential economic slowdowns coming in the Canadian and US economy's high debt rates, AIMCo also sees opportunities to invest in debt, Munsch added, stressing that the fund wants to ensure a long-term view on any new investments.

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