Credit Fund Currency Sleeves

Introduction

In order to attract investors who do not hold investable cash in the functional currency of the fund and who do not have the resources to manage foreign exchange (FX) risk themselves, European private credit managers often offer more than one currency for investors to choose from when investing in a fund.

European credit funds also usually invest across Europe and sometimes beyond and so are exposed to currency risk in relation to their investments that are denominated otherwise than in their functional currency. The return profile of credit investments cannot usually bear material FX volatility, such that this portfolio risk needs to be hedged. In this article, we look at how private credit managers are structuring their funds to offer one or more additional currency option (aka "sleeve") alongside their chosen functional currency, and how those managers are hedging FX risks at both the sleeve and portfolio level.