Rule 18f-4: Trimming Hedges—Hedges Excluded From Derivatives Exposure

Our post on the derivatives exposure equation began with a separate equation concerning interest rate and currency hedges. This post explains the significance of this equation and what hedges should be excluded from a fund's derivatives exposure. Our next post will address hedges included in derivatives exposures before we raise some interpretive questions about how the exclusion should be applied.

Why Hedges Matter

A fund attempting to operate as a "limited derivatives user" must maintain a derivatives exposure that does not exceed 10% of its net assets. Rule 18f-4(c)(4)(B) excludes from a fund's derivatives exposure currency or interest rate derivatives transactions that :