how to know if a fund is hedged

head_in_a_spin

Hi All,

Looking to switch some pension funds into world and us index funds. Also looking to use hedged funds to avoid currency risks. Looking at the funds available some are clearly marked as hedged - so that's an easy call.
However others have GBP in their title but the underlying class mentions USD, others have GBP in their title and have GBP Acc class mentioned in the fund fact sheet.
And only the hedged fund clearly states currency as GBP. Before i make any switches i want to be sure.

E.g.

Vanguard FTSE Developed World ex-UK Equity Index Acc GBP - shows GBP Acc as the class so i assume this is hedged?
HSBC MSCI World NAV GBP - shows USD as the class so i assume this is not hedged - but what is the significance of the GBP in the title?
Fidelity MSCI World Index P Hedged GBP - shows currency as GBP

The vanguard fund is much cheaper but i want to be sure its hedged - any tips on how to categorically find this out?

Thanks!

underground99

head_in_a_spin said:

E.g.

Vanguard FTSE Developed World ex-UK Equity Index Acc GBP - shows GBP Acc as the class so i assume this is hedged?
HSBC MSCI World NAV GBP - shows USD as the class so i assume this is not hedged - but what is the significance of the GBP in the title?
Fidelity MSCI World Index P Hedged GBP - shows currency as GBP

The vanguard fund is much cheaper but i want to be sure its hedged - any tips on how to categorically find this out?

The vanguard fund isn't hedged. It doesn't say anywhere that it's hedged. It publishes its unit prices in GBP because it's marketed to UK investors (who are pretty much the only people who would want to buy a global fund product that deliberately excludes the UK). Many funds that invest internationally and have a UK target audience will price the fund shares in sterling. 

The HSBC MSCI World one is also not hedged. It holds investments to track the MSCI World index which is an index calculated in dollars. You can buy the shares of that ETF on the London stock exchange as HMWO (priced in pounds) or as HMWD (priced in dollars) or if you are in Frankfurt you might buy it priced in EUR. The pricing in a range of currencies make it easy to buy and sell in your preferred currency but do not indicate anything about hedging.

The Fidelity one as its name suggests is GBP hedged. They have a GBP hedged and a EUR hedged version, and even a Czech Koruna hedged version, as well as an unhedged EUR and USD version. However, several of the major UK fund platforms don't offer it. It's an Irish domiciled fund and a number of the UK DIY platforms will instead choose to offer Fidelity's UK domiciled fund "Fidelity Index World" which has a lower OCF, though isn't available as a hedged version.

To hedge or not is a choice of course. For calendar year 2020 you would have been a couple of percent worse off if you used the fidelity GBP hedged product (10.8% return) instead of HSBC's unhedged product (12.5%).  Obviously the differences would be starker in years where the FX swings were greater. A USD investor in something like a dollar-priced iShares tracker would have seen 15% in dollars for that period, as dollars weakened, so would have been happy not to have hedged. 

A Euro investor would have found hedging to be the right move over the last year from this week, as the normal EUR version of the fidelity fund went up 34.78% over the last 12 months to yesterday, while the EUR hedged version went up 43.39% in the same time period.

So, hedging can improve your performance sometimes or hinder it in others. It does remove an element of potential volatility. However if you don't want volatility, you could avoid using a global equities tracker and instead pick a mixed asset fund

head_in_a_spin

Thanks for the detailed reply - much appreciated. I was drawing from a few online pension tutorials one of which seemed to suggest that the base currency of the asset class was an indication of hedging or not. Must admit i was ping ponging about whether to go hedged or not - i intend to invest for at least 10 years. I was reading a bit and some people in the business so to speak more or less saying that you pay more for it but FX is as volatile as the shares you are invested in so whats the point as it all evens out in the end. Then others saying your mad not to hedge. Who knows! Maybe a safe bet is to hedge half of my foreign funds.
Anyone got any particularly strong feelings on it?

Albermarle

Maybe a safe bet is to hedge half of my foreign funds.

In other words hedge your hedging 

AnotherJoe

How can you think you can indefinitely hedge currency risk? Certainly not for free.

Suppose Sterling rises consistently over the next ten years (your time period) do you think wiping that out comes without a cost?

Or suppose it goes up and down which it generally does? Then you are paying twice to get back to the same place, with a cost on top.

Bottom line, no such thing as a free lunch.

head_in_a_spin

How can you think you can indefinitely hedge currency risk? Certainly not for free.

Ermm..not sure i did think that?

The question i had was nothing to do with thinking anything was free or without cost, it was to ascertain what identified a fund as being hedged. Yes the vanguard fund i incorrectly suspected was hedged was quite cheap but hence the question.
A more general question was then really to get anyone's strong thoughts on hedging.

head_in_a_spin

Thanks, that was a very interesting post.

AnotherJoe said:

Bottom line, no such thing as a free lunch.

AnotherJoe - i see you commented on that thread too. Reading your comment there i think perhaps i'm starting to see an interesting
view/point you are making if i understand it correctly - one that perhaps some of us aren't picking up on.

Is this a fair summary:

You pay for the hedging but currencies tend to bounce back and forth and therefor over the long term you arrive roughly at the same place.
But even in a worst case scenario where the foreign currency your investments are in actually do decline over the long term, hedging in this case does not rescue you, it will simply smooth out the fluctuations of the inevitable decline in your investment (and to prevent this you would end up paying heavily for it)?
If i understood this correctly then this sounds like a powerful argument against hedging over the long term.