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Why identical portfolios produce different returns – and why managing FX well matters
Key Takeaways
- Currency movements can make identical credit portfolios produce different reported returns, even when the underlying loans perform as expected.
- Most performance gaps arise from operational timing – how cashflows, hedges and NAV calculations interact across currencies.
- Funds that manage FX well gain strategic advantages, from clearer investor reporting, to broader LP access, to greater freedom in cross-border deal origination, and better underlying investor confidence
Occasionally a private credit fund reports something that appears difficult to explain.
Two share classes invested in the same loans produce noticeably different returns.
The borrowers are servicing their debt, covenant packages are holding and coupon payments are arriving broadly where underwriting expected. Yet when the quarterly report goes out, one share class appears comfortably ahead while the other lags behind.
Across cross-border portfolios, this pattern is surprisingly common. And more often than not, the explanation is not credit.
It is currency.
Cross-border lending has become routine as private credit funds increasingly look beyond domestic markets for opportunities.
Many portfolios now contain loans denominated in currencies different from the fund’s base currency.
Because credit returns are driven by predictable cashflows – coupon payments, amortisation schedules and refinancing events – those cashflows move between currencies throughout the life of a loan. Each time they are converted back into the fund’s base currency, the exchange rate becomes part of the reported return.
Nothing about the credit outcome has changed. But the way those cashflows translate into investor returns can still shift.
Importantly, the currency exposure itself is rarely the problem. The difference between funds that experience persistent performance gaps and those that do not usually comes down to how that exposure is managed.
Managers who clearly understand where FX enters their investment lifecycle, and then align hedging, cashflow conversion and NAV reporting accordingly, tend to avoid the reporting distortions that can make identical portfolios appear to perform differently.
Managing FX well delivers broad strategic benefits. Clear attribution makes investor conversations easier and helps avoid unnecessary volatility that can concern LPs or, in some structures, contribute to redemption pressure.
It also allows funds to market to and accept capital from investors whose prefferred base currency may differ from the fund, and gives deal teams greater confidence to pursue opportunities across markets without being constrained by currency considerations.
In that sense, effective FX management is not simply a treasury function. It is an operational discipline that can materially influence performance, investor confidence and the opportunity set available to the fund.
Written by: James Crown, Head of Dealing at Monex Europe
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