Currency Risk in Cross-Border Funds: What LPs and Fund Managers Ask

Last reviewed: 14 October 2026

Every cross-border commitment to a private fund carries a currency decision, whether or not anyone made it deliberately. A fund that invests in Brazilian reais, takes capital in euros, and reports to a U.S. endowment in dollars has three currencies in play and at least two places where the exchange rate can change the answer. By default the investor carries that risk. A manager can take it on, price it, and put it in writing, and that choice is what this article explains from both sides of the table. Because nearly two-thirds of the LP meetings Private Capital Development has arranged crossed a border, the currency question sits behind much of what we do.

Educational content only, not investment, tax, or legal advice. See the full note at the end of this article.

Who bears currency risk in a cross-border private fund?

The LP bears it by default. An investor that commits in the fund's own currency carries the exchange-rate risk between that currency and its home currency, unless the fund offers a hedged share class or hedges at the fund level. A feeder denominated in the investor's currency changes what the investor pays and receives in. It does not, on its own, change who carries the risk.

Chatham Financial, a hedging adviser, describes three kinds of LP in a fund denominated in another currency. Some want the fund's currency exposure, or hedge on their own, and invest in the main fund. Some want a feeder in their home currency for convenience but still keep or hedge the exposure themselves. A third group expects returns hedged back into its own currency, and does not want to run a hedging program. That third group is the reason hedged share classes exist.

Why does a strong local-currency return shrink when it is converted into my currency?

Because there are two conversions, not one. The assets earn a return in the currency they are priced in. That value is translated into the fund's currency, and then again into the investor's currency. A fund can post a strong return in a local currency and deliver a much smaller one to a dollar, euro, or yen investor if the local currency has weakened over the holding period. The deal can be right and the investor's return can still disappoint.

The effect is not always negative, and it is not always large. Seafarer Funds measured the effect for emerging-market equities over 2000 to 2020 and found that currency moves added about 0.3% a year over twelve-month holding periods and subtracted about 1.0% a year over ten years, against underlying returns of roughly 9% to 12% a year. That is a diversified public portfolio, which is the easy case. A closed-end fund concentrated in one country has no such diversification, and cannot sell its position when the currency turns. Ebury notes that this lock-in is what makes currency share classes particularly relevant for close-ended funds.

What is a currency share class, and how does it work?

A currency share class is a version of the fund denominated in an investor's home currency, usually held through a feeder vehicle. When the class is hedged, the manager sells the fund's currency forward against the class's currency, and rolls that forward on a set schedule. The investor sees returns in its own currency. The cost and the gains or losses of the hedge typically sit with that class and not with the other investors.

The mechanism fits open-ended funds more easily than closed-end ones. Chatham observes that a monthly or quarterly valuation gives a clean point at which to reset the hedge to the size of the investment, so the hedge tracks the exposure closely. Closed-end funds have lumpy capital calls, distributions and exits, so the hedge has to be sized to cash flows that are known only approximately. Ebury's practical guidance is to choose the roll frequency by trading off flexibility and cost: shorter rolls follow the exposure more closely but need cash settlement more often, and longer rolls settle less often but may require more collateral.

What does it cost to hedge currency risk in a private fund?

Three things, according to Ebury: the interest-rate differential between the two currencies, the dealing spread each time a forward is traded or rolled, and collateral drag, which is the performance lost on cash held against margin calls. The first is the least intuitive, because it can be a cost or a gain depending on who is hedging into what.

Under covered interest rate parity, MSCI explains, the cost of hedging equals the interest-rate differential. An investor whose home interest rates are lower than those of the currency it is hedging pays the difference. An investor whose home rates are higher can earn it. That is why the same hedge can look cheap to one LP and expensive to another, and why a manager offering several classes will see different economics in each. The Bank for International Settlements adds a wrinkle: when demand to hedge dollar assets is heavy, the dollar can command a premium in FX swaps, and hedgers pay more than the interest differential alone.

For emerging-market funds with dollar or euro share classes, Ebury notes the interest-rate differential cost can be significant, and partial hedging is one way to reduce it. Dealing costs depend on how often the hedge is rolled and which institution prices it. Collateral drag depends on how much cash the counterparty requires.

What happens if a fund cannot meet a margin call?

The hedge can be closed out, and the fund is no longer hedged, at what may be the worst moment. Ganymede Capital, a fund-finance adviser, wrote in August 2024 that a bank will typically want cash posted on about two days' notice, and that failing to meet a margin call is a default under the ISDA Master Agreement, after which the provider can unwind the hedge. A private fund usually cannot sell an asset in two days.

The practical answer is to arrange the liquidity before it is needed, through a facility secured on the fund or a credit line from the counterparty, and to size it knowing there is a cost to having too much and a worse cost to having too little. Managers who treat hedging as an operational detail, rather than as a decision with a liquidity requirement attached, discover this the first time the currency moves sharply.

How does a subscription credit facility interact with commitments in several currencies?

It adds a second place where currency matters. Mayer Brown explains that when a facility lends in one currency but is secured by uncalled commitments in another, lenders face exchange-rate risk: a move against them can leave the commitments short of the debt even if every investor funds in full. Lenders typically respond by excluding the other-currency commitments from the borrowing base, applying an FX haircut, or netting borrowings and commitments in the same currency. Each approach reduces how much the fund can borrow, or adds reporting. A manager planning commitments in several currencies should raise it with the fund-finance lender before launch, not after the first close.

What is a non-deliverable forward (NDF), and when does a fund use one?

An NDF is a forward contract settled in cash, usually in U.S. dollars, on the difference between the agreed rate and an official fixing rate. No currencies are exchanged. The Bank for International Settlements describes NDFs as the way investors take or hedge positions in currencies under official controls. A fund uses one when the currency it needs to hedge cannot be delivered offshore.

The limit is worth knowing. A May 2005 New York Fed staff note prepared for a BIS committee points out that an NDF protects against moves in the fixing rate and gives no guarantee that the holder can actually convert or move cash at that rate. A hedge can pay out in full on paper while the underlying cash is stuck, which is why capital controls and transfer risk belong in a manager's policy alongside the hedge itself.

Should a fund manager hedge fully?

Not necessarily. Ebury names three drivers of the right hedge ratio: the holding period, because short-term moves tend to smooth out over longer horizons; how much of the asset base already offsets itself across currencies; and currency volatility. A fund whose assets are all in one currency and whose share class is in another typically needs a high ratio. A fund with assets spread across the currencies of its investors may need little.

Seafarer argues that for a diversified portfolio, hedging every currency all the time cost more than the currency risk it removed, and that hedging is expensive, operationally difficult, and not possible for some currencies. That finding is specific to diversified public equities, and a private manager with a concentrated book should not lean on it. It is useful for a different reason: it shows that "hedge everything" is a position to be justified, not a default.

What currency questions will an LP ask a fund manager?

An allocator can reasonably be expected to ask nine things, and each follows from the mechanics above. We have not measured how often any of them is asked, so we do not rank them:

• What is the fund's base currency, and in what currencies are commitments, calls and distributions made?
• Is there a written currency policy, and can the investment committee read it?
• What is hedged: the investor's returns, the assets, both, or neither?
• What is the hedge ratio, and who decided it?
• Which instruments are used, with which counterparties, and who executes?
• Who bears the cost, and who receives the gain, in each share class?
• What liquidity is set aside for margin calls, and what happens if it runs out?
• If the currency is restricted, how is it hedged, and what happens if cash cannot be moved?
• How are exposures and hedge results reported, and how often?

A manager who can answer these in a page has an advantage over one who offers to look into it. An unanswered currency question is an easy reason for an allocator to pause. The time to have the answer is before it is asked.

What should a fund manager's written currency policy cover?

At minimum: the fund's base currency and the currencies of commitments, calls and distributions; what is hedged and what is left open; the hedge ratio and how it is set; the instruments and counterparties; who bears cost and gain in each share class; the liquidity set aside for margin; and how exposures and hedge results are reported. A policy that fits on one or two pages and says plainly what the fund does not hedge is usually more credible than a longer one that implies everything is covered.

Where do managers and LPs get help with this?

From a specialist FX adviser, a bank counterparty, or a fund administrator with a hedging desk, and the right choice depends on what you need. Questions worth asking any provider: is the advice independent of the execution pricing; do they cover the currencies you hold, including restricted ones; can they produce a policy an investment committee will accept; what credit lines and collateral terms can they secure; and what is their regulatory status in the jurisdictions you raise in. Private Capital Development does not advise on currency, set hedges, or execute them, and we do not sell this as a service.

Frequently asked questions

Who bears currency risk in a cross-border private fund, the LP or the fund manager?

By default the LP. An investor who commits in a fund's own currency carries the exchange-rate risk between that currency and its own unless the fund offers a hedged share class or hedges at the fund level. Currency-denominated feeders alone only change the currency of payment, not who carries the risk.

What is a currency share class?

A currency share class is a version of a fund denominated in an investor's home currency, usually through a feeder vehicle. When it is hedged, the manager uses currency forwards to remove the exchange-rate effect between the fund's currency and the share class's currency, so the investor sees returns in its own currency. The class typically bears the hedge's costs and its gains or losses.

What does it cost to hedge currency risk in a private fund?

Three things: the interest-rate differential between the two currencies, the dealing spread each time a forward is traded or rolled, and collateral drag from cash held against margin calls. In theory the hedge cost equals the interest-rate differential, so it can be a cost or a gain depending on which investor is hedging into which currency.

What is a non-deliverable forward, and when is it used?

A non-deliverable forward (NDF) is a forward contract settled in cash, usually in U.S. dollars, on the difference between the agreed rate and an official fixing rate, with no exchange of the underlying currencies. It is used for currencies subject to capital controls or limited offshore delivery. It hedges the fixing rate, not the ability to convert or move cash out.

What should a fund manager's written currency policy cover?

At minimum: the fund's base currency and the currencies of commitments, calls and distributions; what is hedged and what is left open; the hedge ratio and how it is set; the instruments and counterparties; who bears cost and gain; the liquidity set aside for margin calls; and how exposures and hedge results are reported to investors.

Should a fund manager hedge currency risk fully?

Not necessarily. The right hedge ratio depends on the holding period, how much of the asset base already offsets itself across currencies, and currency volatility. Research on diversified emerging-market equities found continuous full hedging cost more than the risk it removed, but a concentrated single-country private fund is a different case from a diversified public portfolio.

Educational content only. This article was researched and drafted with AI assistance, reviewed for accuracy before publication. It explains publicly available concepts for general information, current as of the "Last reviewed" date shown above. It is not investment, tax, legal, or currency-hedging advice, and nothing here is an offer to buy or sell any instrument. Foreign exchange, forwards, options and swaps involve substantial risk of loss and are not suitable for all investors. Private Capital Development LLC is not a law firm, an investment adviser, a commodity trading advisor, a broker-dealer, or a placement agent. We connect fund managers and institutional investors through relationship facilitation on a flat-fee retainer, and we do not verify any manager's track record, conduct due diligence on its fund, or form a view on its investment merit.

Private Capital Development, a Benefit LLC, is a Maryland-based firm founded in 2018 that connects private capital fund managers with institutional allocators through personal, one-to-one introductions. Capital Mobilization is the name of its capital-introduction practice.

About Randy Mitchell. Randy Mitchell is the co-founder of Private Capital Development LLC. He spent thirteen years at the U.S. Department of Commerce / International Trade Administration, where he organized and ran more than 150 LP/GP introductory sessions across 45 cities on six continents. For two decades his work has been the same in both directions: helping institutional investors meet managers worth meeting, and helping managers reach investors in markets where they have no standing yet. He is not a lawyer or a currency adviser, and this article is not advice.

If you are a manager preparing to raise from investors in another country, the introduction is the part we do. Schedule a conversation and tell us the market.

Related reading: What is a cross-border introduction service in private capital? · The Non-U.S. GP's Guide to Raising Capital from U.S. LPs · Marketing a Fund in the European Union as a Non-EU Manager · Concierge · About Private Capital Development

Sources

• Chatham Financial, Establishing and operating hedged sleeves
• Ebury, How to implement a currency share class FX hedging strategy (20 March 2025)
• MSCI, Why Currency Returns and Currency Hedging Matters
• Bank for International Settlements, CIP, FX swaps, cross-currency swaps and the factors that move the basis
• Bank for International Settlements, Non-deliverable forwards: 2013 and beyond; Federal Reserve Bank of New York staff (L. Lipscomb) for the BIS Committee on the Global Financial System, An Overview of Non-Deliverable Foreign Exchange Forward Markets (May 2005)
• Mayer Brown, Subscription Finance: Alternative Currency Capital Commitments (12 April 2023)
• Ganymede Capital, Currency hedging for Private Market GPs (August 2024)
• Seafarer Funds, Managing Currency Risk in the Emerging Markets