Furthermore, the rising tide of the U.S. dollar against foreign currencies has presented challenges for investors allocating capital towards global opportunities. The U.S. Dollar Index has risen 3% year-to-date and almost 2% within the past year, which would pose an issue for unhedged international currency investments.
Source: tradingeconomics.com
However, investors can strategically use HFXI in conjunction with currency derivatives to derive profitable opportunities. At the same time, HFXI can be used by investors as a more tax efficient means to investing in foreign currencies versus trading the actual currencies themselves.
“HFXI is appropriate for those who understand that timing U.S. dollar and foreign currency strength is better traded using a specific timing strategy with currency derivatives,” said Bruno. “To switch from hedged to unhedged international equity ETF’s, or vice versa, is very inefficient. For one, the investor incurs a taxable event if the timing is correct, and those taxes are realized by selling and buying the same underlying equities; this is not an efficient way to trade currencies.
“If the currency call is incorrect, the currency trade losses may erode any equity returns the investor was likely originally intending on experiencing. Our experience is to either trade the currencies more efficiently using derivatives or take the strategic approach of 50% currency exposure, particularly because it is more common to see currencies come back to parity over time. The investor experiences less return dispersion compared to the hedged versus unhedged options by taking the middle-ground.”
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