Active Strategies - currency hedging that can deliver smarter risk management
Passive hedging 3DVVLYH KHGJLQJ is not the norm around the world, HYHQ LI LW UHPDLQV WKH FRQVXOWDQWV ´GHIDXOW SRVLWLRQµ And for some currency proponents the weakness of the passive route has been well-illustrated.
“The passive route is static, maintaining the same level of hedge, driven by a process with changes only being made in relation to the balance of the underlying assets, it does not take into account actions in a marketplace, even massive ones OLNH VWHUOLQJ OHDYLQJ WKH (50 DQG PRUH recently during the fourth quarter 2008 of WKH FUHGLW FULVLV µ H[SODLQV $UQDXG *HUDUG VHQLRU YLFH SUHVLGHQW (XURSH 0LGGOH (DVW %XVLQHVV 'HYHORSPHQW DW 3DUHWR ,QYHVWPHQW 0DQDJHPHQW
“...a better understanding of why and what
currency does to your portfolio performance and how to use it to \RXU EHQHÀW µ
While the levels of the passive hedge can differ for each investment manager, depending on their viewpoint, the reality is that many institutions have chosen another default setting – the 50% hedge. “It’s been a default setting for many consultants – they tend to go for a 50 per cent hedge as a solution of least resistance, but I see it as a position of permanent regret as you’re never really where you want to EH µ ZDUQV *HUDUG ´,Q UHDOLW\ \RX QHYHU ZDQW WR EH hedged 50/50 because you’re neither unhedged nor fully hedged. The 50% hedge recommendation can RQO\ EH WKH SURGXFW RI DYHUDJLQJ µ
GARY KLOPFENSTEIN
Active strategies And the results of the passive route have been brought sharply into focus when compared with active hedging strategies, a term that can still bring a divergence of opinion among those in the industry.
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equities doing very well because sterling fell. If you’d held a passive hedge of 50 per cent the portfolio would have lost 15 per cent, or if it had been a 100 per FHQW KHGJH LW ZRXOG KDYH ORVW SHU FHQW µ KLJKOLJKWV Record. It was, he says, the year that a dynamic hedging strategy would have done well by allowing the manager to rebalance the hedge ratios.
“The reality is that the combination of
currency appreciation and higher yield, means that about 40% of equity
returns came from the currency element since 1998.”
The starting point for the active hedge, is the hedging element itself. In its purest form the active strategy starts by examining a portfolio’s currency exposure and the clients attitude to risk. “What you’re doing is looking at the exposures in there and moving the hedge ratios around, with an eye on client constraints and with the goal of reducing total negative currency impact on portfolio, while
NEIL RECORD
DOORZLQJ SRVLWLYH FXUUHQF\ JDLQV WR SDVV WKURXJK µ VXPPDULHV .ORSIHQVWHLQ ,W VKRXOG DOVR EULQJ WKH EHQHÀW RI UHGXFLQJ WKH VL]H RI WKH QHJDWLYH FDVK ÁRZV and settlements associated with the hedging process.
18 Currency Investor | Autumn 2011
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