Currency Risk in Alternative Investments: A Compilation

Cash Drag and Currency Risk in Alternative Investments

Currency risk in alternative investments is often treated as a market issue. In private markets, it can also become an operational and structural challenge.

This resource brings together four articles by Sean Coakley, CFA, exploring how private market investors may encounter uncompensated FX risk, collateral requirements, cash drag, and SPV banking complexity when managing cross-border investments.

Understanding uncompensated FX risk

When investors commit capital to assets denominated in foreign currencies, they may be taking on more risk than they realize. Currency exposure can add volatility to a portfolio without providing a corresponding return benefit.

For private credit funds and other alternative investment strategies, this can be especially important. Currency movements may affect performance, drawdowns, and return expectations, even when the underlying investment thesis remains intact.

How cash drag can affect returns

Hedging currency exposure can help reduce downside risk, but traditional hedging structures may require collateral. When capital is held aside to support hedges, it may no longer be available for yield-generating investments.

This is where cash drag becomes an important consideration. Even a modest collateral requirement can create a higher return hurdle for private market investors, particularly in strategies where capital efficiency matters.

Why private market structures create added complexity

Private credit, private equity, infrastructure, and real estate investments often involve illiquid assets, fund structures, and special purpose vehicles. These structures can make it harder to access flexible hedging lines through traditional banking channels.

Banks may also face regulatory and balance-sheet constraints that affect how they provide FX hedging facilities, especially where illiquid or difficult-to-value assets are involved.

Exploring alternatives to collateral-heavy hedging

The eBook looks at how specialty brokers and non-bank providers may offer alternative approaches to FX hedging. These may include reduced collateral requirements, flexible margin structures, and tools that help investors manage hedge timing and liquidity more effectively.

For private market investors, the objective is not simply to hedge currency risk. It is to manage that risk in a way that aligns with fund mechanics, liquidity needs, and return expectations.

SPV banking and currency management

Special purpose vehicles can support complex investment structures, but they can also introduce operational friction. Setting up accounts, managing KYC requirements, and moving money across jurisdictions can slow execution.

The eBook explores how banking and currency management for SPVs can become a bottleneck, and why account structures, currency collection, holding, and disbursement capabilities matter in private market transactions.

What readers will learn

Readers will explore:

• why currency risk can be uncompensated in cross-border investments

• how collateral requirements can create cash drag

• why traditional banks may be constrained in providing FX hedging lines

• how specialty brokers may support more flexible hedging structures

• how SPV banking can create operational bottlenecks

• why private market investors may need FX solutions built around fund structure and liquidity needs

Read the full whitepaper to explore structural challenges and practical solutions for managing currency risk in alternative investments.

Sean Coakley, CFA

Director, Strategic Sales & Market Strategist

Sean works with corporate clients and institutional investors focusing on financial risk management, international treasury and working capital optimization.

Cross-Border

Risk management