By Mike Duncan | December 2025
A rates hedge can do everything it was designed to do, and still destroy value over the years that follow.
Duration neutralised. Risk reports are clean. Instruments liquid and familiar. Accounting treatment defensible. Governance sign-off obtained without difficulty. By every measure visible at inception, the hedge is correct.
What is rarely made explicit at the approval stage is the economic choice embedded in the structure. Every long-dated rates hedge either closes the economics of the exposure when it is executed, or defers material risks into the future. Instruments that defer economics leave funding costs, liquidity dependence, and repeated decision-making exposed to conditions that will inevitably change.
Those deferred risks do not appear in the risk report. They accumulate in the background: initial margin immobilising capital from day one, variation margin introducing procyclical cash flows that peak precisely when funding is most constrained, rolling structures embedding repeated repricing as a permanent feature rather than a temporary convenience.
By the time the problem becomes visible, the hedge has stopped providing protection and has started dictating portfolio decisions. Flexibility borrowed from the future has come due.
This executive brief examines why that pattern is so common even in well-governed institutions, what emerging markets reveal about the structural discipline that developed-market liquidity allows institutions to avoid, and four questions every CIO should have clear answers to before approving or inheriting a long-dated rates hedge.
Read the Executive Brief
The Rates Hedge That Looked Right Until It Didn’t
