| No need to worry about currency risk |
|
|
| 19/02/2006 | |
|
Investors hedging their currency risk might be wasting their time, according to the London Business School academics that prepared the Global Investment Yearbook 2006 along with ABN Amro. "A key strategic issue for global investors is whether to hedge their foreign-exchange exposure", say Professors Elroy Dimson, Paul Marsh and Mike Staunton. The report by the academics, which stems from the analysis of data dating back to 1900, shows that while hedging reduces risk, the gains from risk reduction have declined over time and are now modest compared with the gains available from diversifying equity portfolios internationally. They explain that this is because investors in a foreign stock market implicitly take a stake in two assets – a country's equity market and its local currency, which tend to move independently of each other. " In our example, with 16 local currencies and the US dollar as the reference currency, the two assets even tend to move counter-cyclically in relation to each other", they write. An unhedged portfolio might even be sometimes beneficial. "A number of researchers have noted that, over long investment horizons, unhedged international portfolios might even have lower long-term variability than their hedged counterparts, when measured in real terms." Pointing to the short-term risk of exchange rate, they say that currency hedging is nevertheless sometimes warranted. "[…] As investors with exposure to the US dollar over 2005 learned, over shorter intervals the exchange rate really matters." On average, they found that although exchange rates are quite variable, they add only a moderate amount to the volatility of a portfolio of shares. The research also debunks the paradigm that a strong currency favours the equity markets. "Our preliminary long-term evidence shows that over the long haul, equity returns have not been bolstered by currency strength. Historically, avoiding weak currencies might have been justifiable to control risk, but not to enhance performance", write the academics. |
|
Articles of the same Topic : Currencies |
|
© Copyright 2008 bfinance. This document is for your personal non-commercial use. Any further copying, reproduction, distribution is strictly prohibited. To obtain permission please contact This e-mail address is being protected from spam bots, you need JavaScript enabled to view it