Dynamic Currency Hedging
Aims to improve upon investors' existing currency exposures by dynamically increasing hedging in periods of foreign currency weakness and reducing hedging in periods of foreign currency strength.
Characteristics
Tailored to individual base currencies.
Customised benchmarks from fully hedged to unhedged.
Can be calibrated and rebalanced versus index weights or actual portfolio weights.
We believe that unmanaged (passively held) foreign currency exposure is sub-optimal and that dynamic hedging provides an effective solution to manage this risk and improve upon the results of a passive hedge by mitigating drawdowns and enhancing cash flows.
Approach
Millennium Global’s dynamic hedging programmes are designed to capture currency market drivers that impact FX over different time horizons. These drivers include momentum (short-term), macroeconomic views (medium-term), and risk premia (long-term).
Dynamic hedging programmes focus on developed market currencies which typically account for the vast majority of currency risk in an international portfolio.
We adopt a systematic approach using quantitative models which generate signals for each developed market currency exposure in a portfolio versus the base currency.
Benefits
A primary aim of Dynamic Hedging is to minimise drawdowns versus both unhedged or partially hedged approaches.
The cash flow profile versus a passive hedged solution is enhanced by effectively increasing the hedge during periods of base currency appreciation and reducing the hedge during periods of depreciation.
This strategy seeks to reduce risk compared with having unhedged currency exposure and to manage risk more effectively than a passive hedge.
Further Insights
Dynamic Currency Hedging
Chapter 6 of our 'A Comprehensive Guide to Currency Issues for Institutional Investors' introduces dynamic currency hedging. It explores how hedging foreign currency exposure reduces the risk inherent in overseas investment and how a dynamic approach is superior to a passive strategy given the cyclical behaviour of currency markets.