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Managing fund level liquidity

  • Chris Towner headshot


    Chris Towner

    Managing Director
    FX Advisory

    Private Equity | London


How to manage cash liquidity when hedging the FX risk of non-liquid assets. We are witnessing an increasing number of funds acquiring assets not just cross border but also cross continent. This list of considerations will help you navigate your fund’s FX risk and develop a robust hedging strategy.

When a fund has a potential variable exposure to multiple currencies with varying levels of volatility, gauging cash liquidity requirements can be challenging.

Chatham Financial’s solution can forecast the potential cash requirements for margin and settlement obligations, and automate the construction of the strategy to manage it.

Step 1: Quantitative evaluation

Our specialist FX quant team have developed a technique whereby you can simulate various scenarios based on the proportion of the fund which may end up being invested in other currencies. There are no limitations to the number of different currencies that the model can tolerate.

The above graph will illustrate the potential mark-to-market a fund could face for their hedging strategy depending on the movements of a currency that they currently invest in.

Step 2: Determining potential future exposure

A selection of 3-5 simulations will provide a range for the fund’s potential future exposure within varying probabilities (set % or standard deviations). This allows you to confidently plan to accommodate for potential cash requirements arising. This also provides the critical information to use in discussions with banks/counterparties on funding and liquidity requirements.

Step 3: Setting up counterparties

Chatham Financial will assist you in setting up the required number of hedge counterparties, and negotiate the legal and commercial terms of your ISDA/CSA. The key is to negotiate the highest possible threshold for an unsecured facility, providing a buffer from potential margin calls. Chatham negotiates over 3,000 ISDA/CSAs annually and has advised on over 6 trillion USD of hedges since inception. Our scale allows us to negotiate the most competitive terms for our clients. Beyond the thresholds negotiated with your counterparties, an RCF facility can also be negotiated against the uncalled, committed capital of the LPs, up to the point that the fund becomes fully invested and all LP capital is drawn.

The bar chart illustrates the total liquidity buffer, which includes both the unsecured liquidity and RCF.

Step 4: Design optimal hedging strategy

Design the optimal hedging strategy to align with the objectives of the fund and investor requirements. The key aspect is to determine the hedging policy and decide what the objective of the FX hedging programme is. Are you concerned about the impact of FX volatility on the NAV of the fund? Or is your objective about managing the transactional exposure of distributions? Or are you more concerned about containing the volatility that FX movements have on the IRR of the fund? The design of the strategy will focus on three key variables – tenor, proportion of exposure to be hedged, and instrument choice.

Step 5: Execution

Chatham Financial will negotiate fair and transparent execution and credit charges.

Step 6: Ongoing hedge and liquidity management program

  • Establish a liquidity management program, backed up by technology, to forecast liquidity requirements, alongside a live valuation portal for all outstanding derivatives.
  • Analytics of the performance of the hedges can also be provided on an ongoing basis. These can include the mark-to-market of the hedges overall or by counterparty and currency, a summary of all the hedges by number of trades, notional and tenor, and risk analysis of the hedges themselves on the fund. We can also prepare bespoke board reports.

We have seen a surge in fund level FX hedging over the last couple of years, with funds looking at overseas assets in a multitude of currencies. A well-managed FX hedging strategy allows the accompanying FX risk to form part of this strategy rather than a hindrance to this strategy. Please contact your Chatham representative to discuss your requirements in more detail.

About the author

  • Chris Towner

    Managing Director
    FX Advisory

    Private Equity | London


Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit

Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.