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Do you hedge currency exposure for foreign stocks?


matjone

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We do hedge, & typically between CAD, USD, & Pounds Sterling. We take the view that over the long-term, CAD should be roughly 63-67c to the USD, & 2.30-2.50 to the pound. Move $ out at 1.00-1.05, & back at < .60-.65. The $ themselves, invested in high quality local opportunities.

 

It works very well, & is consistent with value investing; as one is always selling the desired asset & buying the despised one. It works better if one can also speak/read the foreign language, & has a network of contacts in those locations.  As much of the gain results from picking up on the moods of the times, language/culture sensitivity is important.

 

Leave the firms themselves to optimize their product sales in the most desirable locations; it is what they do best, & they are far better at it than you are.

 

SD

 

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The way I think about hedging is really simplistic (maybe too naive), but it's this:

 

Do I want to bet on the things that I understand and can reasonably foresee (which would be the price per share of the company I'm buying) or do I want to make a macro currency bet? For those opting for the former, it should be straightforward. By not hedging aren't you implicitly betting that the foreign currency will either stay flat or go up in value relative to your home currency?

With currencies you are always making an implicit bet on something, and it really shouldn't be called hedging because you are either long your home currency or long some foreign currency. It is not possible to have a hedged position with zero exposure.

 

Well the bet that I make is that I'm too uninformed to predict the direction of currency, hence I only wish to benefit from the change in the underlying stock price without the results getting distorted by change in currency values...if that makes sense? I do not wish to add an additional variable (currency values) into my ultimate results. Because without hedging you have got to believe your home currency will weaken...and I feel like it's best to hedge if you have no view on the currency's future value.

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I think that only makes sense superficially. Measuring your results in your home currency makes sense, but ignores the complexities of the real world. Perhaps you have bought a business that imports from your country and they will suffer if your home currency rises, or perhaps they export to your country and they will gain if your home currency falls. So you can't make a bet on a stock price without results getting disturbed by changes in currency values: doesn't matter if you have "hedged" it or not. And usually, the relationships are way too complex to figure out because there are not a lot of companies that simply import from one country and export to another country. So that variable that you don't want to add to your results is always already there. by hedging you only change it in a somewhat random way.

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The reality is that we measure relative to our home country; FX change is material, & a fact of life.

 

All a Canadian resident need do is open a USD account; make a deposit when the rate is favourable, & withdraw it when the rate is unfavourable. Invest CAD 10,000 @ 1.05 to deposit USD 10,500; withdraw the USD 10,500 @ 0.65 & repatriate CAD 16,154 (10,500/.65). Net gain of CAD 6,154 (61%).

 

But what to do with the USD 10,500? Least risky is to simply buy a discounted long treasury, & sell it into the liquid market when the money is to be repatriated. At the other extreme, buy a USD denominated 3-5 year distressed bond at 0.45-0.50 - & wait for improvement/recovery. A twist on the same theme is to simply hold a liquid but distressed inter-listed equity (ie: a TSX listed PWT/PWE:US).

 

Obviously not for everybody, but it has to be in the tool kit.

 

SD

 

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We do hedge, & typically between CAD, USD, & Pounds Sterling. We take the view that over the long-term, CAD should be roughly 63-67c to the USD, & 2.30-2.50 to the pound. Move $ out at 1.00-1.05, & back at < .60-.65. The $ themselves, invested in high quality local opportunities.

 

How did you come up with those figures?

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