CREATING A CURRENCY HEDGED STRATEGY
US dollar is the global currency. It is much difficult not to notice any news or event revolving the greenback. Any development from this currency change the way market and investors react one way or another. Hence, investors perceive the necessity to monitor the dollar and the investing time horizon. However, not every trader knows how to use a currency hedged strategy in their portfolio.
While we can look at each factor influencing the currency, there’s one important variable which is easier to gauge: investment time horizon.
Finding ways to curb currency risks hangs on time horizon. Several studies show there is a huge difference in the risk/return ratio of hedged and unhedged techniques in terms of the length of time an individual remain invested. Returns are generally considered a zero-sum game. Either way, hedged currency techniques can lower volatility even though hedged and unhedged strategies produce almost the same returns.
In employing this strategy, think of two things when knowing how much of portfolio should be hedged: asset allotment and hedging policy. Let’s expound on this area using a simple risk-and-return depiction. Imagine there are two sides on the screen. The left side shows low risk/low return investments and on the right side are the prospective high risk/high return investments. The middle portion may denote an investor’s risk appetite.
Reckoning a foreign investment? It is significant when investing abroad, one has to grasp the differing traits of every country in each region. Certain features may not be related to the United States. That element can determine whether to hedge or not, and, if so, how much. Just in any other types of investment, the asset allocation should be based on the extent of risk an investor can take.
Depending on the risk tolerance and short-term dollar movement, investors may want to make their trading techniques currency hedged to minimize the impact of volatility over the long stretch.
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