Dynamic Currency Hedging Q4 2015

WisdomTree

Research

24 Pages

WisdomTree explores how dynamic currency hedging can improve international equity exposure by adjusting hedge ratios using value, momentum, and interest rate signals. The paper argues investors implicitly speculate on currencies when unhedged, while multi signal overlays historically added return and reduced volatility versus passive hedging.

Key Takeaways

Signal Overlay Edge: From 1988 to 2015, the Record Signal Overlay delivered 5.87% annualized returns versus 4.54% for a 100% passive hedge.
Currency Risk Impact: Over 20 years, MSCI EAFE volatility fell from 16.7% with currency exposure to 14.8% without currency exposure, reducing incremental portfolio risk by 2.0%.
Interest Rate Advantage: The multi signal overlay earned a 0.69% annualized interest rate differential versus 0.38% for a 100% passive hedge between 1988 and 2015.
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