(updated with correction)
The dollar's rise is bringing the issue of currency hedging back into some institutional investors' conversations.
Executives from managers like BlackRock Inc. and J.P. Morgan Asset Management suggest perhaps now is a good time to be reviewing and considering currency exposures for multiasset-class portfolios, and consultants suggest there might be value to engaging in strategic hedging.
And currency hedging is on the list of discussion items for the investment committee of the $14.2 billion New Mexico Public Employees Retirement Association, Santa Fe.
But still there are those asset owners, consultants and managers who believe currency over time is a wash, and therefore the cost of hedging programs isn't worth it to the long-term investor.
The U.S. dollar rose nearly 4% against a basket of currencies following Donald Trump's November election win and is up roughly 25% since 2014. It dipped a bit following Mr. Trump's comments about the dollar being too strong, but rallied on Jan. 18 after Federal Reserve Chairwoman Janet Yellen said the central bank expects a few rate hikes a year through 2019.
Celia Dallas, chief investment strategist at Cambridge Associates LLC, Arlington, Va., cited a major reason long-term investors are still skeptical about implementing currency hedging programs: uncertainty as to where the dollar will move.
“It's not a foregone conclusion that the dollar is going to appreciate,” she said.
“There's a lot of uncertainty in the currency arena today centered (on) what protectionist policies there will be. This is a complex challenge for investors,” she added.
Added Steven J. Foresti, chief investment officer of Wilshire Consulting, Santa Monica, Calif.: “It doesn't seem important to pay the costs of putting a currency program in place. But the conviction to that approach is tested when you're in a strong dollar environment. I think that's what's going on now.”
Although there are some benefits such as hedging risk and taking advantage of fluctuations among currencies, many executives interviewed for this story ultimately don't think hedging programs for long-term investors are worth the effort — or cost. Paul Bosse, a principal with Vanguard Group Inc.'s investment strategy group, said in a phone interview that “very long-term investors probably should not hedge,” because not only is the rising dollar “not a sure thing,” but also “there's no embedded return,” because currency is a risk factor.
“Studies have shown that long term, there's no return to currency. It's simply noise. It's risk and you have to decide if you want to get rid of it, and at what cost?” he said.