Ratings house Standard & Poor’s has placed two unit classes in the HFA Diversified Investments Funds ‘on hold’ following notification that the fund has altered its method of hedging foreign exchange exposure.
The move appears to follow a trend with respect to funds with foreign exchange exposures.
Commenting on the move, S&P Fund Services analyst Simon Scott said that like many locally-offered fund of hedge funds, the liquidity of the Diversified Investment Fund had been affected by the substantial increases in collateral required to manage the recent large moves in the Australian dollar.
“HFA Asset Management has altered its hedging policy to make use of longer-dated options that do not require intra-month movements of collateral,” he said.
“The fund remains fully hedged over this longer term, but in the interim the fund will be exposed to the mark to market valuations of the options, which could materially affect fund returns in a negative (or positive) manner.”
“The fund maintains its leveraged position requiring a larger amount of hedging collateral. While the operation of the policy retains the full hedge at the end of the term, S&P feels the change in risk profile during the term does not match the product disclosure statement’s view that ‘the fund’s hedge unit classes will attempt not to benefit or be disadvantaged by any significant movement in the fund’s direct foreign exchange exposure’,” Scott said.
He said investors should expect to be able to determine whether they wanted to take on such a risk policy and that while it was seen as a temporary measure, it would remain until either the old policy could be re-established or a new method of providing a fully hedged exposure through intra-month capital movement could be implemented.
S&P said the ‘on hold’ rating would be reviewed once a long-term currency hedging solution had been implemented.
