The adoption of a hedging strategy can offset the loss of returns resulting from currency variations when investing in US assets, with interest rate changes set to intensify those differences.
Investors looking at investing in US dollar-denominated assets without considering currency hedging may miss out on strong growth in that market when returns are brought back into Australian dollars, according to a treasury risk advisory firm.
Rochford managing director Tom Averill said the Australian dollar has ranged widely in comparison to the US dollar over the past two decades and these variances can negatively impact offshore US-focused investors.
“In the last 20 years, the range has been 65 cents to $1.10 and while it got down to below 60 cents during COVID, dips below 65 have been brief and triggered by some kind of big macro event,” Averill said.
“The Australian-US dollar relationship is going sideways at the moment because the US dollar is supported by the Federal Reserve raising interest rates more aggressively than any other central bank, but rates in the US will change at some point.
“When that cycle shifts, the Federal Reserve will lead the world in lower interest rates just as it led with higher rates and we expect rates to come down in the US more quickly than they will in Australia, which will provide a tailwind for the Australian dollar.”
He said the benefits of hedging during these shifts can be seen in past market movements, including the recovery of the S&P 500 after the global financial crisis (GFC).
“We saw almost 90 per cent rally in the S&P after the GFC and the Australian dollar rallied from 60 cents to $1.10. If you were unhedged instead of your return being 90 per cent, it was about 16 per cent,” he said.
“The currency rally removed the vast majority of that investment return and it’s a great example of how significant a currency move can be a drag on return, particularly when the Australian dollar is coming from such a low base.
“Looking at the Australian dollar at the moment, we are at 20-year lows and if you are investing new capital offshore at the moment, you might want to have an instrument that helps you lock in some of that currency gain as there is a real chance that currency risk could be a big drag on returns over the next two to three or four years.”
His comments follow the release of a hedging solution for share investors who use managed accounts to hold US dollar assets that is aimed at wholesale and sophisticated investors, including SMSF trustees.
The Leveraged Long Australian Dollar Fund is leveraged up to three times, which means for investors to achieve a 100 per cent hedge to the US dollar, they only need to allocate one-third of the capital they wish to invest.
The fund is being made available via a number of investment platforms operated by financial advisers, with a minimum investment of $20,000, and will allow investors to exit and reset their hedged positions quickly.''