An effective hedging strategy helped this company dodge FX losses during Covid-19

In 2012, Swedish entrepreneurs Max Ellberg and Axel Djurson spotted a budding trend in digital health and decided to jump on it. They founded startup Newgen Distribution with the aim of distributing the fitness tracker Fitbit to the Scandinavian market.  

The decision was a smart one, as the popularity of such wearable health devices and other connected technologies has since skyrocketed, and Newgen has managed to ride the wave. The Stockholm-based company has grown to an annual turnover of SEK 400 million (around EUR 40 million) and broadened its product range, becoming a leading distributor of wearables, robotics, drones and other connected technologies in Northern Europe.  

In addition to seeing market opportunity, Newgen has also benefited from a similar forward-looking approach when it comes to managing its currency risk. Since 2019, the company has used FX hedging to shield its bottom line from currency volatility – a risk management policy that paid off significantly when the Covid-19 pandemic hit in March. 

As a distributor, Newgen is the link between electronics makers such as Fitbit, Tile and Sphero and local sellers, including department store chains and e-commerce vendors. With most of its import purchases in EUR and USD and the bulk of its sales in SEK, the company is exposed to currency risk, according to Newgen CFO Bengt Hunyadi. 

“In March, when corona hit, markets were very nervous, and the small currency SEK plummeted compared to the EUR and USD. We would have lost maybe 10% in the exchange rate, but because we had hedging contracts in place, we managed to avoid the loss,” says Hunyadi. 

The goal: predictability  

Soon after joining Newgen in 2019, Hunyadi engaged Nordea’s FX team to conduct an FX risk analysis on the company, which showed that the company was highly sensitive to FX fluctuations. Nordea recommended implementing a so-called “layered” hedging program, where hedge ratios are built up over time.  

Under the strategy, Newgen calculates the amount of each currency it will likely need in the future. For the three months to come, it hedges 75% of those payments; for three to six months out, 50%; and for six to nine months out, 25%. As the months pass, new hedging contracts are continuously added. 

“With Nordea’s help, we managed to achieve our purpose of having a more predictable and smooth level of exchange rate through hedging contracts. We were lucky to enter the period of high FX volatility in the spring with our hedges in place,” says Hunyadi. 

Not all small to mid-size companies in the Nordics have been so lucky, according to a recent study by Nordea, which found that around almost half of such companies take no measures to reduce their currency risk. What’s more, roughly over half report having taken hits from currency fluctuations during this volatile year.  

Asked what advice he would give to other companies trying to navigate these volatile times, Hunyadi says it’s undoubtedly to implement a similar hedging strategy to Newgen’s: “Not to earn more money, but to control the risks,” he says. 

Layered hedging: “No strategy pushes volatility as low” 

Hedging programs are designed to avoid short-term fluctuations that could threaten a company’s long-term goals or even its future in general, according to Mattias Göthberg on Nordea’s FX team in Sweden, who works with Newgen. He says that, while most hedging programs meet the purpose of lowering volatility, no strategy pushes volatility as low as the layered approach. 

“The reason for this is basic mathematics at work. The build-up of hedges in all tenor buckets will, by definition, smooth out the FX rate. The coming quarter will consist of hedges done during different periods, in different market environments, thus creating a nice average rate,” says Göthberg. 

Yet while layered hedging may be one of the most effective strategies, it can also be a burden for smaller companies strapped for time and resources.  

“It’s a more intensive hedging approach that requires keeping track of future flows and updated hedge ratios,” says Göthberg. 

While Newgen CFO Hunyadi is able to manage the administration, monitoring currency rates daily and updating hedges, many small companies don’t have a dedicated person to manage that FX risk. That has made the layered approach an almost unattainable strategy for many small and mid-sized companies up until now, with Nordea’s release of a new automation tool for hedging FX risk, called AutoFX Hedging.