Pathfinder Monthly Commentary: don't hedge currency - ever!

Fund managers, financial advisers and investors provide many reasons for not hedging currency.  Below is the first part of a two part commentary looking at the merits of the “top 10” reasons to not hedge.  We focus on the long term strategic hedging costs and benefits.  These are quite distinct from short term tactical views on whether at current levels the NZ dollar is fairly valued (we will save the current valuation question for another day).  Below we provide 5 commonly heard reasons for not hedging – and conclude by providing some practical hedging thoughts. 

Reason 1 – don’t hedge because…. there is extensive research telling us not to hedge

True, there’s plenty of hedging research – the problem it’s typically not from a NZ investor’s perspective (mostly US or European perspectives).  We are not aware of any credible research establishing in the long run NZ investors shouldn’t hedge.   In fact to the contrary, what limited research there is establishes a compelling argument for NZ investors to maintain at least a partial hedge.   (See for example MSCI Barra’s 2009 paper titled “Currency Hedging: a free lunch?” which looks at currency hedging for investors in 10 countries. They conclude “for NZD based investors, hedging made sense from a return/risk perspective regardless of market and horizon.")

Reason 2 – don’t hedge because…. hedging is a “zero sum game”