There is no right or wrong answer to the question of whether to hedge global equity portfolios.

The slide in the Australian dollar (A$) last year begs the question of whether it’s time to consider hedging global equity portfolios in anticipation of a potential rebound in the currency.

The recent drop meant a 100% hedged investment in the MSCI World ex Australia index fell 2.87% in the September quarter as global shares retreated, versus a more modest loss of 0.43% from an unhedged investment.

Some experts are forecasting the dollar will soon recover from its recent lows, which would potentially reverse those returns in favour of hedged investments.

In early October, NAB was forecasting the AUD/USD spot exchange rate will rise steadily from US64 cents in September to US73 cents by year-end and continue its upward trend into 2024. Westpac had a more conservative view, predicting the $A will reach US66 cents by December and not hit US70 cents until the end of 2024.

History though shows currency forecasting is inevitably fraught due to the wide range of variables that can alter the direction of an exchange rate, including geopolitical events, monetary policy decisions and an inflation outlook.

Take your pick

As a result of this unpredictability, many fund managers offer both unhedged and hedged versions of the same global equity funds forcing advisers and retail clients to choose a currency strategy that best suits their own outlook.

This dichotomy is evident in the Australian Exchange Traded Fund (ETF) market, where there is both an unhedged iShares S&P500 ETF (ASX: IVV) and a hedged version of the same fund (ASS: IHVV).

Likewise, there is both an unhedged version of Vanguard’s MSCI Index International Share ETF (ASX:VGS) and a hedged version (ASX:VGAD). Betashares also offer an unhedged option for its NASDAQ 100 ETF (NDQ), as well as a hedged option (ASX:HNDQ).

The returns of iShares two S&P500 ETFs show just how much volatility in the $A can impact returns. The unhedged version gained 13.82% in the three years to September 30, versus a 7.78% gain in the hedged product.

Diminishing difference

Over the long term though, the difference between hedged and unhedged portfolios may be less stark. Various research studies invariably suggest the difference between the two forms of investment is neutral over long periods.

Some pundits argue this makes currency hedging a more appropriate consideration for people with relatively short investment horizons, such as those close to retirement, while for others it’s a zero-sum game.

There is no right or wrong answer to the question of whether to hedge global equity portfolios; in fact, this is perhaps more so for this asset class than any other. It may all come down to individual circumstances and objectives just like all asset allocation decisions.

By Brett Grant, Head of Product, Marketing and Customer Experience

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