What Does a Hedged Fund Do?

Chris75

I know what hedging is when I am talking about buying something in a foreign currency at a fixed point of time in the future (it effectively guarantees the exchange rate that I will get at a point in the future) but I am not sure about it when I am told it is applied to a fund that I might hold for many years & which has holdings that it might also hold for a long time.

Are they really saying that I will not suffer/gain from any currency movement over the entire time that I hold the fund no matter how long that might be?

AnotherJoe

It depends what they are hedging against. Hedging isn't just about currency.

However note that you dont get something for nothing, so there's a cost to this service, which means your gains (disregarding currency movements) will be lower than if you didn't use a hedged service, and there's also a limit as to how much they can and will hedge and over what time period.

So no, they are not saying "that you will not suffer/gain from any currency movement over the entire time that I hold the fund no matter how long that might be?"

Chris75

I thought not.

I am having trouble finding out exactly what some of the hedged funds are hedged against.

For example:
iShares III plc Core MSCI World UCITS ETF GBP DIS H (IWDG)

AnotherJoe

I really dont see the point of a hedged fund apart from a very short term situation. You cant be hedged agaisnt reality.

Chris75

I am not sure that I do either. That does not mean that I don't want to know exactly what I would be paying to be hedged against.

Alexland

Have you tried reading the fund overview on the fund manager's website? Eg for your iShares IWDG

https://www.ishares.com/uk/intermediaries/en/products/287737/ishares-core-msci-world-ucits-etf-fund

All currency hedged share classes of this fund use derivatives to hedge currency risk. The use of derivatives for a share class could pose a potential risk of contagion (also known as spill-over) to other share classes in the fund. The fund's management company will ensure appropriate procedures are in place to minimise contagion risk to other share class.

iShares also provide an overview of their currency hedging.

https://www.ishares.com/uk/institutional/en/themes/currency-hedged-etf?siteEntryPassthrough=true&locale=en_GB&userType=institutional

Currency movements can significantly impact the total returns of international investments across asset classes. The more volatile the currency, the larger the potential impact on portfolio returns when measured in the base currency. For investors wishing to reduce this volatility, currency-hedged ETFs could provide a solution by allowing them to hedge the currency risk of their investments, reducing the potential impact of currency fluctuations. Currency markets can also be highly volatile which can have an impact on the investment.

I agree with AnotherJoe that currency hedging is of limited benefit in long term investment however might have a role in reducing volatility as the withdrawal date approaches. But by that time you might be considering currency hedged bonds too.

I am however a fan of equity hedging to reduce volatility caused by stock market movements in Balanced funds which do not want to hold too many bonds due to the interest rate risk.

Alex

Chris75

Yes I have seen those. The 2nd link suggests to me that the whole thing is currency hedged forever. This seems to me unlikely which is why I asked the question.

"For investors wishing to reduce this volatility, currency-hedged ETFs could provide a solution by allowing them to hedge the currency risk of their investments, reducing the potential impact of currency fluctuations". (iShares)

Alexland

If you currency hedge on any given period you avoid a gain or loss if the currency moves and the asset has not changed price in its local currency. That the gives you a starting amount for you to currency hedge again for the next period, etc. It could continue forever.

So if you continually currency hedge you could avoid a long term movement in currency valuations. However there are costs, it's not perfect and does introduce new risks.

Thrugelmir

As was the case some years back. You can hedge and cross hedge to the cows home in an attempt to make a profit. However when double zero comes up on the roulette wheel. You can still be wiped out.