Top 3 FX challenges facing UK fund managers

Many fund managers treat FX like people treat dentistry. When there are no signs of pain, it’s not a priority – but when the pain starts, it quickly becomes an emergency.

FX can make or break fund managers’ returns and have a serious impact on operational costs. In this blog post, we’ll discuss the top three FX challenges UK fund managers are currently dealing with, as revealed by our latest research, along with strategies to address them.

 

1.     Cost calculation – 37%

In the world of fund management, calculating the costs associated with FX transactions remains the most significant challenge for fund managers, with 37% identifying it as an issue, an increase from 33% in 2023.

Managing multi-currency portfolios often means handling complex FX conversions, where minute discrepancies in rates can compound significantly over time, eroding overall returns. Unlike other cost elements that are more straightforward, FX costs are inherently dynamic, influenced by volatile currency movements and variable transaction fees.

This unpredictability means that fund managers are constantly seeking ways to more accurately forecast and control FX expenses to maintain their portfolios’ performance.

The calculation of FX costs is made more challenging by the absence of standardised practices in the industry. Many fund managers rely on multiple liquidity partners, each with unique pricing models, spread markups and fee structures. The lack of transparency in these FX markups can make it difficult for fund managers to understand the true cost of their FX transactions.

So what is the solution?

One possible approach is to implement a comprehensive FX risk management strategy, comprising regular reviews and comparisons of the pricing structures offered by different liquidity providers. This can help fund managers identify potential cost savings opportunities and negotiate better rates. Some solutions can provide fund managers with access to a multi-bank FX platform, allowing them to compare live rates from multiple tier-1 liquidity partners, ensuring they gain full transparency on FX costs and helping them to achieve best execution.

Leveraging technology also enables fund managers to automate key FX processes, create detailed reports and analyses of past transactions, and identify patterns and trends in their FX costs.

For example, an independent transaction cost analysis (TCA) can allow fund managers to assess the true cost of their FX trades by revealing hidden costs in the spread and evaluate their execution quality against market benchmarks, helping to drive more informed decision-making.

 

2.     Reliance on manual processes - 36%

Many fund managers continue to rely on outdated, manual processes for instructing FX transactions, with phone calls and emails remaining the primary methods among UK fund managers. In fact, 77% still depend on these traditional approaches to execute transactions. In North America, fund managers have adopted more modern solutions, with APIs (32%) and web apps (30%) being the most popular methods to transact, leaving only 50% still using phones or emails.

Operating FX processes via these manual processes is a huge drain on efficiency and can take up a significant portion of funds’ manpower and time. It makes no sense to operate with these processes when far more modern alternatives exist. It’s the equivalent of sending someone a message via fax in this day and age, rather than a simple text message.

Managing manual processes has been highlighted as a key challenge for UK fund managers in 2024, with 36% reporting it to be a critical issue. However, this appears to be a particularly persistent challenge, with 39% saying this was an issue in 2023.

Smaller funds (£40-80 million assets under management) also relied more heavily on manual processes than larger funds (£9-16 billion AUM), with 38% instructing over email and 44% over the phone, in comparison to 21% and 36% respectively. This underscores a major gap between smaller and larger funds in adopting automation technology for their FX processes, likely due to limited resources, expertise and tighter budgets, creating constraints on investing in such technology.

For those looking for alternatives, they may find solutions in the below:

• API’s (31%): APIs serve as bridges, enabling different software systems to communicate and in turn exchange data. Leveraging APIs for FX transactions allows businesses to automate trade execution by integrating an FX platform into their own systems.
• Online User interface (28%): 3rd Party Web Apps, are software applications, designed and built by 3rd parties, accessed through a web browser.
• Instructing via your own IT system (26%)

 

3.     Onboarding new liquidity providers - 34%

The onboarding process for new liquidity partners is often still outdated and cumbersome, causing a great deal of trouble for fund managers. Protocols often require vast amounts of paperwork and securing ISDA agreements, a time consuming process which can take months, often draining time and manpower. This process can be even more challenging for small and medium-sized fund managers who do not have the resources to navigate through complex legal agreements and compliance requirements.

To solve this issue, 20% of fund managers are considering automating the onboarding of liquidity providers, to streamline the process. Partnering with FX technology providers can bring this lengthy process down to only a few weeks through express ISDA agreements. This not only enables faster setup of FX counterparties but also facilities FX cost savings by accessing multiple new liquidity streams more quickly.

 

How can MillTechFX help?

Our FXaaS provides fund managers with an automated FX workflow solution, allowing them to seamlessly instruct trades and oversee their hedging programs. Fund managers can also choose to outsource FX operational functions, including hedging calculation, execution management, settlement, and trade reporting to save time.

Moreover, our free quarterly transaction cost analysis provides fund managers with full transparency into their FX costs and provides insights on how to optimise trade execution techniques.

If you’d like to learn more about our solutions, you can request a demo here.

 

 

This blog examines the data and results of surveys by Censuswide on MillTechFX’s behalf conducted in August 2023, June 2024 and September 2024 based on surveys of 252 (2023) and 250 (2024) UK senior finance decision-makers and 258 North American senior finance decision-makers at mid-sized asset management firms in the UK and North America (described as those with assets under management ranging from (£500m to £20b UK 2023), ($500m to $20b North America) and (£40m - £16b AUM/$50m to $20b AUM UK 2024).

This blog, including the information provided herein, is provided for information purposes only and does not constitute an invitation or offer to subscribe to or purchase any of the products or services mentioned.

The information contained is intended for Professional Clients (or elective professional clients only). MillTechFX does not target retail clients as the products offered by MillTechFX are not suitable for or made available to retail clients.

The information herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice or investment recommendations. You should consult your investment, tax, legal accounting or other advisors.