FILE PHOTO: U.S. dollar, Euro and Pound banknotes are seen in this illustration taken May 4, 2025. REUTERS/Dado Ruvic/Illustration/File Photo

By Lucy Raitano

LONDON, Dec 2 (Reuters) - Almost half of UK fund managers are planning to increase their currency hedging in 2026 due to volatility in the pound, a new report from FX and cash management solutions provider MillTech found.

The report, which surveyed over 250 UK fund managers about their hedging plans and costs, found 48% are planning to increase their hedge ratios and 46% plan to extend their hedge lengths in the next year.

Almost all of them reported losing money due to unhedged FX risks.

It has been a choppy year for FX markets, with sterling in particular facing heightened volatility in recent weeks in the run-up to British finance minister Rachel Reeves' long-awaited UK budget last week. <LINK PLS>

The pound logged a small gain in November and is still on track for a 6% advance in 2025, its most since 2017's 9.5% rise.

It remains about 4% off a four-year high touched in June, as investors avoided U.S. assets in light of U.S. President Donald Trump's erratic trade policies. Yet this was swiftly followed in July by the currency's worst monthly performance since 2022.

Now, more than half of UK fund managers who are not now hedging their FX risk are considering doing so. Only a fifth expect to reduce hedge ratios and just 7% will shorten tenors.

The mean hedging ratio fell to 46%, the lowest since before 2023, and the average hedge length now stands at 5.5 months, up slightly from 5.2 last year, but below 5.7 in 2023, showing a more measured approach to FX risk management this year.

Meanwhile, the cost of hedging has risen 69% over the past year. Almost a fifth of respondents said their costs had more than doubled, while just over a quarter cited higher costs as their main concern.

When it comes to U.S. tariffs, fund managers are as much concerned about the impact of policy changes on currency values as they are about increased volatility. They are also delaying major decisions due to high levels of uncertainty, the survey showed.

AI adoption in FX processes is rising, with a quarter of funds using the new tech in their processes, while almost a third are exploring its use.

(Reporting by Lucy Raitano in London; editing by Amanda Cooper and Mark Heinrich)