EUROPE – Large continental European pension schemes with currency mandates are in effect acting like hedge funds in the foreign exchange market, says a top currency manager at State Street.

“They are approaching currency management as a source of alpha,” said Paul Duncombe, head of currency management at State Street Global Advisors.

He posited that a scheme could have a €500m ‘notionally unleveraged’ mandate that would operate, from the point of view of the manager running the assets, like a hedge fund. But from the scheme’s perspective, it would be hedged elsewhere within the total portfolio, with currencies that the plan already has. “At plan level there’s no leverage,” he told journalists.

He said the comments applied to some of State Street’s clients in the Netherlands and Switzerland, though he declined to name them.

Earlier this year the second largest Dutch scheme, health care fund PGGM, said it had benefited from the dollar’s slide against the euro. Gerlof de Vrij, the fund’s head of strategy and research investments, said PGGM’s decision in 2000 to fully hedge its currency exposure had paid off.

And late last year the Bank for International Settlements said pension funds were helping to drive activity in the foreign exchange market as part of a “global search for yield”.

In October IPE reported that interest in currency overlay management was growing as pension funds seek to gain extra returns through investments with a low correlation with traditional asset allocation.

Online foreign exchange firm FXall said this week that trading by asset managers in 2004 rose 146% to $1.036trn in 2004. FXall’s overall volumes in 2004 reached $4.9 trillion, up 104% - with asset manager clients rising to 135.

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