Institutional funds' increasing exposure to hedge funds means some are beginning to consider foreign exchange volatility as a separate asset class, said Robert Hayes, head of strategic advice at Merrill Lynch in London. Hayes noted institutional funds, who have looked at allocating assets to currency hedge funds, will likely have noticed some hedge funds trade foreign exchange volatility separately to the underlying currencies.
Hayes noted, however, it could be some years before institutional funds isolate their fx volatility exposure. "In practical terms, we are a long way from doing this," said Hayes. "But in the future it could be that people will look at detangling volatility from their fx management," he added.