Bonds Funds - Forward Contracts

grizzly1911

Just been routing through some Bond Fund holdings and three I have looked at are showing sizeable GBP Forward contracts, between 18% - 48%.

I appreciate what forward contracts are but if they are simply gambling on a positive shift from their contracted buy/sell price that seems a bit like putting it all on black or red. It may be a string of contracts, either way to mitigate risk, but it would also reduce potential at the same time.

Can anyone shed any greater insight as to how these are being used?

Jegersmart

Hi

In order to even have a guess one would need a lot more detail than you have given. Which funds? Which currency are the main assets held in? What are the main assets? Which companies are involved? Do you mean that they have a position in GBP currency derivatives? Normally this would indicate that they are hedging the exposure to currency but as we don't know anything around what you are referring to it would be difficult to give an opinion.

J

grizzly1911

Jegersmart wrote: »

Hi

In order to even have a guess one would need a lot more detail than you have given. Which funds? Which currency are the main assets held in? What are the main assets? Which companies are involved? Do you mean that they have a position in GBP currency derivatives? Normally this would indicate that they are hedging the exposure to currency but as we don't know anything around what you are referring to it would be difficult to give an opinion.

J

I had thought about hedging or future closing deals being covered/fixed in advance

Invesco Perpetual Monthly Income Plus is an example

http://www.citywire.co.uk/fund/invesco-perpetual-monthly-income-plus/c9313?section=money#assetalloc

Jegersmart

Hi Grizzly

Thanks for more information, although one should point out that the the term GBP Forward contract is extremely generic and can cover many things. My guess is that it is a hedge against the GBP rising too much against the Euro/USD - and it is a guess only. Also, the 49+% could be because most of these things are leveraged so that they have to show their outright exposure in real terms rather than margin with stops etc. - not sure.

In any case that would be my guess and HTH.


J

Shaolin_Monkey

I'd also guess something to do with currency hedging. In the Sterling Strategic Bond sector, currency hedging back to GBP is required on non sterling denominated assets above a certain level. Morningstar gives a different picture, with long and short exposure to "cash" which I would suspect is actually mostly these forward contracts. http://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F0GBR04RXD&tab=3

Jegersmart

Shaolin_Monkey wrote: »

I'd also guess something to do with currency hedging. In the Sterling Strategic Bond sector, currency hedging back to GBP is required on non sterling denominated assets above a certain level. Morningstar gives a different picture, with long and short exposure to "cash" which I would suspect is actually mostly these forward contracts. http://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F0GBR04RXD&tab=3

Yes, who knows how they report or classify them but currency futures can be long and/or short positions and are just financially settled in accordance with the contracts in question thus providing a hedge.

J