Funds that choose to invest in traded life policies (TLPs) must use a blend of currency hedging solutions to deal with FX markets volatility, says Managing Partners Limited (MPL).

At the Insurance-Linked Securities Summit conference, Jeremy Leach, managing director of MPL, told delegates that 'chronic' FX volatility poses the greater liquidity risk for TLP funds, which are United States-issued whole of life policies, sold before maturity so original policyholders can enjoy some of the benefits in their own lifetimes.

Predictable returns can be expected for investors, but with TLPs being dollar-denominated assets, currency risk must be hedged for sterling and euro investors.

"The most cost-effective way to hedge currency risk is by purchasing forward foreign exchange transactions," explained Leach. "But a 'Forward' either creates cash or consumes cash, depending on whether the dollar strengthens or weakens. If a currency pair, such as dollar-sterling or dollar-euro, moves significantly ion an adverse way then that creates an enormous liquidity burden on a fund by eating away at the cash reserves."

With the sterling's stability currently hanging in the balance thanks to the prospect of a hung parliament, and the euro threatened by the Greek, Spanish and Portuguese credit risks, a range of options and forwards are necessary, Leach said.

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