Emerging Markets: Microfinance Funds Get FX Hedging Help

Investor: News

By Gordon Platt

Hedging currency exposure in illiquid and volatile frontier markets is about to get easier for investment funds focused on microfinance. Cygma Fund, based in Kennett Square, Pennsylvania, is being set up as a hedging platform to mobilize local-currency financing. Cygma Fund will act as the counterparty to microfinance funds on transactions that strip out the foreign exchange risk using currency swaps.

As the number of microfinance institutions (MFIs) that rely on Western sources of funding grows, currency risk is becoming an increasing concern for investors and MFIs, says Art Avedisian, president of Cygma Corp., a subsidiary of Chatham Financial. Cygma provides currency hedges and consulting services to microfinance investment vehicles and MFIs.

Cygma Fund will offer its investors leveraged exposure to a diversified portfolio of forward exchange contracts in frontier currencies. “The key is that these exotic currencies tend to be uncorrelated and are broadly dispersed throughout the world,” Avedisian says. “This enables us to take on our clients’ FX risk and manage it in ways that would be very difficult for them to do on their own.”

The International Finance Corporation plans to invest up to $10 million in the fund, which will have a minimum capital of $50 million and will provide up to $500 million in local currency hedging for microfinance. Microfinance investment funds have provided attractive returns in the past few years and are attracting the attention of European investors in particular, Avedisian says.