FX risk insights for NA Funds heading into 2026

Foreign exchange markets have a way of making their presence felt - quietly at first, then suddenly, all at once. The year shattered any lingering belief that FX represents merely a secondary consideration. With tariff policies dominating headlines and policy shifting dramatically from one day to the next, currencies have been anything but stable.

North America's fund managers found themselves at the epicentre of this volatility. Their response, captured in the MillTech North America Fund Manager CFO FX Report 2025 reveals an industry moving beyond mere adaptation toward comprehensive FX risk management restructuring.

 

Key insights:

• 85% of North American fund managers hedge forecastable FX risk, the highest level we have recorded in the past three years.
• 99% of funds report higher hedging costs, with 58% seeing increases of 50–100%, pressuring margins.
• Fragmented FX provision is pushing funds toward automation across settlement (49%), price discovery (47%) and risk identification (46%).
• Every fund surveyed outsources at least part of its FX operations, marking a decisive shift toward specialist support reliance.

 

Hedging hits record highs as funds race to protect portfolios

A striking 85% of North American fund managers now hedge their forecastable currency risk - the highest level we have recorded across the past three years. This shift comes amid 37% of funds suffering losses from unhedged FX positions in 2025. Among non-hedgers, 70% are now considering doing so, surging from just 16% last year.

Against this backdrop, firms adopting hedging strategies have embraced greater agility. Hedge ratios dropped to a mean of 45%, while hedge lengths shortened to an average of five months. As fund managers respond to accelerated market movements, 95% of funds increased their options usage, with smaller firms leading adoption as they seek downside protection while preserving upside potential.

 

Dollar swings inflate returns - but also deliver painful losses

Despite turbulence, politically-driven dollar volatility generated unexpected tailwinds. A staggering 99% of fund managers’ report positive return impacts from these fluctuations this year.

The picture remains mixed, however. The same volatility that lifts results one moment can erode them the next, as the recent prevalence of losses shows. This tension has fuelled widespread concerns, with 99% of fund managers worried about the potential impacts of dollar volatility on foreign market exposures and 58% describing themselves as very concerned.

In response to this anxiety, many funds are reshaping their FX strategies. Increasing hedge ratios (54%) and extending hedge durations (52%) have emerged as the two dominant approaches to preparing for continued volatility.

 

Hedging costs climb as firms face tightening conditions

Hedging became more essential but significantly costlier in 2025. 99% of North American fund managers’ reported increased hedging costs, jumping sharply from 80% in 2024. More than half (58%) experienced cost increases between 50% and 100%, heavily pressuring margins.

It's not just hedging costs, either - a more challenging credit environment means that many funds are encountering tighter conditions from their providers: 72% report stricter lending criteria and the same proportion have faced higher interest rates or fees. Smaller funds bore the heaviest impact - experiencing steeper cost increases and greater difficulty securing credit lines.

Surging hedging costs and tightening market conditions are forcing fund managers to rethink how they approach risk. The rising expense of hedging is squeezing margins to the point where some are questioning its financial viability, while fragmentation and tougher credit conditions are adding further strain. In this environment, success hinges not only on managing FX risk, but also on securing the right partnerships and maintaining operational efficiency to stay resilient

Joe McKenna, Head of Fund Solutions

 

Operational strain pushes automation and AI to the forefront

Rising costs weren't the only pressure reshaping FX management. Operational strain intensified, with fragmented service provision cited by 36% of managers as their primary challenge. This comes amid continued reliance on manual FX workflows, with 6 in 10 now instructing transactions by email and 5 in 10 by phone.

Amid these pressures, modernisation appetite surged. Automation rose to top priority status, up from second bottom of the list in 2024. The key areas targeting for FX automation - settlement (49%), price discovery (47%) and risk identification (46%), directly address fragmented process pain points.

AI adoption accelerated in parallel. Every fund surveyed is now at least considering AI, with 77% already using it or aggressively evaluating potential applications. Surprisingly, smaller firms lead adoption (50%), whilst larger firms are more cautious (29%).#

 

FX outsourcing becomes a strategic pillar for fund managers

As market conditions grew more complex, outsourcing became core to FX operations management. Every firm surveyed now outsources at least some FX workflow elements, marking a decisive shift toward specialist support reliance.

Motivations varied by role and size. CFOs primarily sought outsourcing for risk management and compliance strengthening (37%), while COOs and CEOs placed greater emphasis on specialized expertise access (80% and 67%, respectively).

Smaller funds focused on gaining specialized expertise, alongside scalability and flexibility (44%), helping them remain agile and competitive without needing to expand headcount or infrastructure.  

Conversely, larger funds focused on achieving greater efficiency and automation (53%), integrating external solutions to streamline high volume, complex FX operations.

Outsourcing became a cornerstone of FX strategy, helping fund managers navigate rising costs, operational pressures, and growing market complexity. Smaller funds turned to third parties for expertise, scalability, and flexibility needed to stay competitive, while larger firms leveraged outsourcing to boost efficiency and automate complex, high-volume operations. While motivations vary, across the board it's clear that tapping external specialists became an essential tool for fund managers.

Eric Huttman, CEO at MillTech

 

US and Canada diverge in their approach to FX volatility

Amid persistent market turbulence, US and Canadian fund managers find themselves navigating similar pressures, yet their responses to heightened volatility reveal striking differences shaped by distinct market dynamics, regulatory landscapes and strategic preferences that have emerged throughout the year.

Both regions hedge 85% of their FX risk and report that dollar movements have generally lifted returns. Despite this similarity, Canadian managers are more concerned about dollar volatility (63%), compared to their American counterparts (55%).

When it comes to strategies for combating dollar volatility, the divergence becomes even more pronounced. US funds are significantly more likely to increase hedge ratios (56%), reflecting a more aggressive defensive posture, while Canadian funds demonstrate a stronger inclination to extend hedge durations (55%).

Product preferences mirror this strategic split: US funds tend to favour currency swaps (49%), whereas Canadian funds lean more heavily on FX swaps (61%), highlighting fundamentally different approaches to risk mitigation.

The biggest operational challenge plaguing US funds remains fragmented service provision (35%), with nearly half placing their greatest emphasis on automating settlement processes to address these inefficiencies. In Canada, the landscape shifts differs, with the top hurdles being securing credit lines and onboarding liquidity providers (41%).

On the technology front, Canadian managers are surging ahead in AI adoption, with 47% already implementing AI solutions and 37% exploring it’s capabilities aggressively, compared with 39% and 34% respectively in the US. This technological advance comes despite Canadian funds showing greater reliance on traditional manual methods - email (70%) and phone (63%) - than their US counterparts (54% and 47%).

 

Conclusion: Building FX resilience in a volatile landscape

Dollar volatility poses heightened risks for funds, with immediate implications for returns, liquidity and overall portfolio stability. In an environment where the dollar can wipe out gains as quickly as it can deliver them, building a smarter, more resilient FX strategy is no longer optional; it is urgent.

FX risk management must be at the top of the agenda. Hedging strategies, when executed effectively, can protect margins and mitigate unexpected losses, while outsourcing FX operations to experienced providers offers access to specialized expertise, enhanced efficiency, and greater transparency.

Together, these steps enable funds to navigate volatility with confidence and position their portfolios for more consistent performance.

 

Want to explore the research in detail? Download the full report for free here: The MillTech North America Fund Manager CFO FX Report 2025.

Please refer to our Research Disclosure Page for more information on the data referred to in the above.