Whether large or small by any scale, most pensions and endowments are exposed to a “fiduciary loophole” in foreign exchange as a result of using external managers and the pension’s custodian to execute currency trades.
When external managers are hired, most asset owners assume they have outsourced 100% of the fiduciary duties related to foreign exchange. This is not the case because
98% of external managers do not trade restricted currencies in house (Korea, Brazil, Taiwan, etc.), leaving those trades with the asset owner’s custodian, who as principal act in their own interest, not in the interest of the Pension Fund.
To read the full paper, click here: Fiduciary Loophole