Managing EUR exposure for a USD private credit fund

 

Overview

For private credit funds investing across currencies, FX volatility can directly affect returns, NAV and investor reporting. Where a fund is denominated in US dollars but holds EUR-denominated assets, movements in EUR/USD can change the value of investments even where the underlying credit performance remains unchanged. 

Marex supported a USD private credit fund by implementing a three-month rolling FX hedge program to manage its EUR exposure across a portfolio of European investments. 

 

The challenge

Our client, a USD-denominated private credit fund, was making a number of euro-denominated investments across Europe. 

While the underlying loans were performing in line with expectations, the fund had a clear currency mismatch: its investor base, reporting currency and return targets were in US dollars, while part of its portfolio was exposed to the euro. 

This created three key risks: 

• adverse EUR/USD movements could reduce the USD value of euro investments 

• FX volatility could affect reported NAV and investor returns 

• the exposure could change over time as loans were repaid, refinanced or drawn further 

The client wanted to reduce currency risk without locking into a hedge profile that was too rigid for a private credit portfolio, or creating an additional cash margin requirement within the fund. 

 

The solution

Marex worked with the client to assess the euro exposure across the portfolio, including outstanding loan balances, expected interest receipts, loan maturities and potential repayment dates. 

Rather than placing a long-dated hedge against the full exposure, Marex implemented a three-month rolling FX forward strategy. 

This allowed the client to hedge its EUR exposure back into USD over shorter periods while retaining flexibility to adjust the hedge as the portfolio changed. 

At each roll date, the hedge could be reviewed against: 

• outstanding euro loan balances 

• expected repayments or refinancings 

• changes in portfolio exposure 

• market conditions 

• the fund’s internal hedge policy. 

The hedges were structured without a cash margin requirement, allowing the client to manage the FX exposure without setting aside cash collateral during the life of the trades. 

 

The result

The strategy gave the client a more controlled approach to managing currency risk across its European investments. 

The client was able to: 

• reduce the impact of EUR/USD volatility on USD returns 

• improve visibility over NAV and investor reporting 

• align hedges with the changing profile of the loan portfolio 

• avoid over-hedging assets that could repay or refinance early 

• review the strategy at any point during the hedge period 

• avoid cash margin requirements during the life of the hedges 

• maintain flexibility as new investments were added or existing loans were repaid. 

For the client, the key benefit was control. The fund could continue investing in EUR-denominated private credit opportunities while managing FX risk back to its USD base currency in a flexible and capital-efficient way.