Investing in Multiple Currencies: Why It Matters?

investment management

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As a venture capitalist or fund manager, you’re likely always looking for ways to build a diversified portfolio. If so, have you considered foreign currencies? The lucrative foreign exchange market can deliver both long-term and short-term benefits, allowing you access to higher returns or alternatively wiping out your returns.

But as with any investment, there are risks. So, how do you manage the risks that come with investing in foreign currencies? Since foreign exchange volatility can have a large impact, hedging FX (foreign exchange) exposure is critical.

Why VCs Invest in Foreign Currency Markets

Venture capitalists invest in foreign currency markets because there is a great potential for high returns.

Also, venture capital funds that have exposure to foreign exchange markets and large positions in portfolio companies in countries using other currencies allow you to use a hedging strategy. This helps to eliminate downside risk with currency swap forward contracts.

With a currency forward contract, or currency forward, you can lock in the price you pay for a currency in the future. Currency hedging allows you to reduce exposure to foreign exchange risk while retaining the original equity exposure.

The Benefits of Investing in Multiple Currencies

The benefits of investing in multiple currencies include:

Diversification: Being able to do cross-border investing into different currencies, will give you a much wider scope of deal flow in which you can invest into, assuming your fund has the capability to do this.
Level playing field: Another key benefit of investing in multiple currencies is that there’s a level playing field. With this asset class, you’ll have access to news that drives currency prices on a real-time basis. There aren’t any “insiders” in the foreign exchange market. The pieces of different currencies depend on current events and monetary flows. Since information on these factors is readily available through the news, you can perform your own analysis on how these events might impact its currency.

Is There a Risk in Investing in Multiple Currencies?

There is always a risk, no matter which portfolio company you invest in. However, each one comes with its own unique risks. And foreign currencies are no exception.

Critical world events can impact the value of foreign currencies. These events can happen without warning, so you won’t know exactly how they’ll play out once they start, giving you little time to prepare. As a result, this asset class is often subject to volatility, which means there may be more ups and downs than the stock market.

Also, leverage further amplifies the risks of the forex market. This is similar to trading stocks on margin because you can risk more money than the value of your capital account. While having high leverage can increase your chances of gaining significant profits, it can also multiply your losses if it doesn’t go in your favor.

Things to Consider When Investing in Multiple Currencies

As you invest in multiple currencies, it’s critical to evaluate your investments over time to prevent loss at the expense of FX rate.

Below are key things to consider when currency hedging:

Know that it’s incredibly difficult to predict the timing of currency movements. Predicting when the price of a particular currency may rise or fall can be an extremely challenging task. That’s because exchange rates tend to vary over time, and can be volatile over shorter time periods.
Understand that the impact of currency movements tends to diminish over time. While exchange rates regularly fluctuate, the impact of currency on investment returns declines over time.
Be aware that currency movements tend to even out in a diversified portfolio. A well-diversified portfolio has exposure to many different currencies. To further minimize risk, you can spread your investments. And only choose the currencies of countries you’re following closely. If you’re going to use leverage, start slow and work your way up.

Use a Tool to Monitor and Manage Your Investments in Foreign Currencies

Foreign diversification offers great profit opportunities. However, managing your portfolio on your own can be a pain. But what if you didn’t have to do it alone?

Rundit is a portfolio monitoring and investment management tool that helps investors evaluate their fund investment in multiple currencies, in real time, with just a few clicks. Book a call with us and learn more!