How UK funds are recalibrating FX strategies for 2026

Key takeaways:

How has FX volatility affected UK fund managers?
FX volatility has largely boosted returns, with 96% of fund managers reporting a positive impact from pound movements in 2025. However, the same volatility has exposed weak protection, with 95% of funds experiencing losses from unhedged FX exposure.
Why are some fund managers hedging less despite higher volatility?
Rising hedging costs and forecasting existing currency risk have been key constraints. Mean costs increased by 69% in 2025, with tighter credit conditions (56%) further limiting how much FX risk managers can economically protect.
What tools are fund managers using to manage FX risk more effectively?
The use of FX options is rising sharply, with 91% of funds increasing usage to cap downside risk while preserving upside potential. Digital execution is also gaining traction, though many funds still rely on manual processes.
What are the biggest FX challenges facing fund managers heading into 2026?
Rather than one dominant issue, fund managers face a balanced set of pressures, including high costs, difficulty forecasting currency risk, manual processes and securing credit lines.
How is FX risk management expected to evolve beyond 2026?
Many fund managers are utilising automation and outsourcing to improve visibility, execution and control. Many view a digital, multi-bank FX platform with advanced automation as the ideal future-state operating model.

Volatility boosts returns, but exposes weak protection

FX volatility created a paradox for UK fund managers last year: it boosted returns for many, but also exposed the cost of inadequate protection.

Nearly all respondents (96%) reported that pound volatility had a positive impact on returns, with more than half describing the effect as significantly positive. Well-positioned portfolios benefited from currency movements, turning a potential drag into a tailwind.

However, these gains came alongside sharply rising hedging costs. Mean hedging costs increased by 69%, with more than seven in ten funds seeing costs rise by at least half. Tighter credit conditions (55%) have compounded the pressure, forcing managers to weigh the affordability of protection more carefully than in previous years.

Against this backdrop, hedging participation eased. While 81% of UK fund managers continue to hedge their FX exposure, this is down from 88% in 2024, reflecting the growing cost and liquidity trade-offs involved.

The consequences of reduced protection have been stark. Almost all UK funds experienced losses from unhedged FX exposure in 2025 (95%), with two in five describing those losses as very significant. Volatility may have supported returns overall, but insufficient protection left many portfolios exposed when currency moves turned unfavourable.

How funds are evolving their hedging strategies

Faced with higher costs and exposed downside risk, UK fund managers are adjusting not just how much they hedge, but how they hedge.

Despite widespread losses from unhedged exposure, the average hedge ratio has fallen to 46%, its lowest level since data collection began in 2023. At the same time, average hedge length has edged higher to 5.5 months, up from 5.2 months last year. Together, these shifts point to a more selective approach: favouring agility over blanket coverage, hedging long enough to smooth near-term volatility, but short enough to adjust quickly if the pound’s direction changes.

Differences by fund size are becoming pronounced. Larger funds hedge a greater proportion of their exposure and for longer periods, with mean hedge ratios of 55% and hedge tenors of seven months, compared with 40% and five months among smaller firms.

The tools used to manage FX risk are also evolving. The use of FX options continues to rise, with 91% of UK funds reporting increased usage over the past year. Options are increasingly favoured for their ability to cap downside risk while retaining upside potential, a valuable trade-off in volatile and cost-constrained markets.

Operational change, however, is moving slower. Digital execution is gaining gradual traction, with web-based platforms used for FX trade instruction rising from 28% to 39%. Despite this progress, many funds remain reliant on manual processes, limiting speed, transparency and control.

“What we’re seeing is a more pragmatic approach to hedging. Managers are increasingly weighing the trade-off between protection, cost, and operational flexibility. Rather than targeting a specific ratio, they’re building hedging strategies that can evolve with the fund.”

Joe McKenna, Head of Fund Solutions at MillTech

The FX challenges facing fund managers heading into 2026

UK fund managers continue to face a broad and balanced set of structural FX challenges. No single issue dominates: each of the top five challenges is cited by around one in four fund managers (27%), highlighting the cumulative nature of the pressure across the industry.

High hedging costs sit at the centre of these challenges, eroding performance margins - particularly for smaller funds (39%) with less balance sheet flexibility. At the same time, tighter credit conditions (55%) are making it harder secure credit lines constraining how much risk managers can hedge.

These financial pressures are compounded by forecasting and operational challenges. Difficulty in accurately forecasting existing currency risk is limiting managers’ ability to size and time hedges effectively, increasing the risk of misaligned protection as market conditions shift. Continued reliance on manual FX processes - particularly email (47%) and phone-based (45%) trade instruction - adds friction, reduces transparency and heightens operational risk.

Overlaying these issues is a regulatory and compliance demands, with enhanced reporting and transparency expectations increasing administrative and operational complexity.

FX risk management in 2026 and beyond

Looking ahead, FX risk management is increasingly defined not just by how much risk is hedged, but by how effectively it is executed.

Automation has moved firmly up the agenda. Two in five fund managers identify automating manual processes as their leading operational priority for 2026, with reporting, price discovery and trade execution emerging as the key focus areas for 38% of funds.

Adoption of AI is also accelerating. A quarter of funds are already using AI within their FX workflows, while a further 71% are exploring its capabilities in some capacity. Rather than being treated as a standalone innovation, AI is increasingly viewed as a tool to enhance decision-making speed and accuracy as FX markets grow more complex.

Alongside technology, outsourcing is becoming a more central pillar of FX strategy. Faced with limited internal expertise (20%) all fund managers surveyed now rely on external partners to some extent. The primary motivations include improving scalability and flexibility (41%), allowing teams to focus on core business activities (38%), and strengthening risk management and compliance frameworks (32%).

Looking to the future, funds have a clear view of what effective FX operations should look like. One third of funds (33%) say their ideal FX setup is a digital, multi-bank platform with advanced automation capabilities - signalling where FX strategy and execution are ultimately heading.

“Fund managers shouldn’t settle for fragmented systems and opaque pricing. They want a single, digital ecosystem where automation, AI, and multi-bank access work seamlessly together. Those who embrace this shift will gain the speed, transparency, and control needed to protect their bottom line”

Eric Huttman, CEO at MillTech.