Currency Hedging

SniperWish
SniperWish

What does Veeky Forums think of currency hedging? I'm in Canada and I was considering buying the CAD-hedged s&p500 etf -
vanguardcanada.ca/individual/mvc/detail/etf/overview?portId=9562&assetCode=EQUITY##overview

In theory it should make sense since CAD is relatively low right now and will no doubt shoot up sometime soon, nullifying pretty much any s&p gains for a long time as I understand it. Would it not be wise to buy the CAD-hedged version? I'm a little confused as to how to go about this.

But this nerd seems to say different.

canadiancouchpotato.com/2014/03/06/why-currency-hedging-doesnt-work-in-canada/

Why isn’t hedging effective in Canada? The Pyramis researchers explain that the US dollar, euro and Swiss franc tend to have negative correlation with the global equity markets. (Recall that when all risky assets plummeted in 2008, the US dollar soared.) Negative correlation is what diversification is all about: any part of your portfolio that goes up when equities go down is a welcome addition, so exposure to these currencies is a benefit, and hedging wipes it out. As the J.P. Morgan authors write: “The hedge will tend to produce profits at the same time that equity markets are advancing, and produce losses when equities are falling.” In other words, it magnifies volatility rather than reducing it

Thoughts?

All urls found in this thread:

vanguardcanada.ca/individual/mvc/detail/etf/overview?portId=9562&assetCode=EQUITY##overview
canadiancouchpotato.com/2014/03/06/why-currency-hedging-doesnt-work-in-canada/

ZeroReborn
ZeroReborn

no doubt shoot up sometime soon

I kinda stopped reading right there.

eGremlin
eGremlin

also the reason why us equity markets have a semi negative correlation with the us dollar is because in order to buy us equities, you need us dollars, and to sell us equities, you get us dollars. there is really no research needed to be done for that.

Ignoramus
Ignoramus

No but really shouldn't CAD go up? Historically this is about the lowest it gets unless you're implying oil will never appreciate

Nojokur
Nojokur

also the reason why us equity markets have a semi negative correlation with the us dollar is because in order to buy us equities, you need us dollars, and to sell us equities

Yes I understand that... But obviously buying into the s&p is a good idea longterm, what I'm not understanding is how can I do that from Canada?

Since it would seem it's impossible to dollar cost average regularly due to currency fluctuation, that's why I considered CAD-hedged ETFs

Supergrass
Supergrass

Ayy! Didn't expect to find a pic of adie on this board. Miss ya bro

Harmless_Venom
Harmless_Venom

obviously buying into the s&p is a good idea longterm, what I'm not understanding is how can I do that from Canada?

Why exactly would it be difficult for you to buy into the EssenPee from Maplelandia?

Lord_Tryzalot
Lord_Tryzalot

miss you, bro
Adie
not King Milkfart

It's like you dont even know how to grieve

MPmaster
MPmaster

Why exactly would it be difficult for you to buy into the EssenPee from Maplelandia?

Just told you man. Because I have to buy it with CAD, so right now if I buy $20,000 worth of s&p and CAD starts going up it'll negate any possible gains the s&p will make.

viagrandad
viagrandad

Take investment-ready amount
50% into Burgerbucks to buy SP, 50% kept in Maple Leaves just in case it shoots up.

That way you either make out on the SP500 as it shoots up and CAD doesn't, or CAD shoots up and you make out anyway because the money 'negated' is now non-negated since the same amount of gain was made to equal the profit/loss to 0:0 with the syrup in your pocket, and the SP500 is all that matters as far as your margin

happy_sad
happy_sad

Caring about le diabetic manlet

He found a gf stopped lifting and became a beta

haveahappyday
haveahappyday

implying I give a hot gay fuck about adie

He was as full of shit and obnoxious as Tiny. I just miss milk and his astounding barrel of scooby oc that never seemed to end. Dude was funny as fuck i hope hes doing standup now or something

takes2long
takes2long

Should I not then buy a 50/50 split of the s&p with my leaf bucks AND invest in one or more Canadian ETFs with the rest?

That way it should balance out right? Since if I'll be losing all my money from s&p appreciation on CAD rising I'll make around that much from the Canadian ETFs?

Hope that makes sense, It seems to make some for me.

massdebater
massdebater

cad is a commodity currency tho

idontknow
idontknow

also just trade options lol
you can effectively hedge better

5mileys
5mileys

Why isn’t hedging effective in Canada? The Pyramis researchers explain that the US dollar, euro and Swiss franc tend to have negative correlation with the global equity markets. (Recall that when all risky assets plummeted in 2008, the US dollar soared.) Negative correlation is what diversification is all about: any part of your portfolio that goes up when equities go down is a welcome addition, so exposure to these currencies is a benefit, and hedging wipes it out. As the J.P. Morgan authors write: “The hedge will tend to produce profits at the same time that equity markets are advancing, and produce losses when equities are falling.” In other words, it magnifies volatility rather than reducing it
This paragraph is full of fuck.

Of course when USD/Equities goes down it's better to be holding USD but how the everliving fuck do you expect to make money holding both sides of the trade? That isn't a hedge it's just holding no position.

iluvmen
iluvmen

but how the everliving fuck do you expect to make money holding both sides of the trade? That isn't a hedge it's just holding no position

I think he meant that if you're holding(in this case) both the s&p denominated in CAD and a Canada market ETF you're essentially hedging against eachother.

How is that NOT a hedge?

Techpill
Techpill

I think he meant that if you're holding(in this case) both the s&p denominated in CAD and a Canada market ETF you're essentially hedging against eachother.
I see.

Is the line of reasoning:
canada stock market ETF goes up -> CAD 'down' -> USD 'up' -> S&P down ?

Seems like this implicitly relies on the Canadian market and US market being anti-correlated somehow, which doesn't seem to be the case (see pic)

Methshot
Methshot

lol did the same

SniperGod
SniperGod

I think it's the opposite.

If s&p is kicking ass then the USD should be strong and same for Canada.

That should make sense, so really it's close to a hedge

VisualMaster
VisualMaster

If s&p is kicking ass then the USD should be strong and same for Canada.
How does one make sense of this then? Prior to the 07-08 debacle CAD is making serious gains on USD then as soon as the US crash comes USD rebounds.

Spazyfool
Spazyfool

While yes, the decision to hedge is correct if the loonie appreciates, your logic of the Canadian dollar "will no doubt shoot up sometime soon" is severely flawed.

Not too long ago, the loonie was at parity with the greenback. But prior to that, starting way back from the 80's, the loonie was always sitting at 0.65-0.85 USD. The Canadian economy was stable at this exchange rate, and it became very unstable when the loonie was at-par. Exports collapsed as Canadian goods became too expensive and companies went bankrupt.

Now, the loonie has gone back down to 0.60 and corrected itself around 0.75USD, and this is the level that is sustainable for the Canadian economy.

You're not going to see the loonie appreciate much more than that, since the value is dependent on oil prices, which are not going to shoot up anytime soon.

There's no reason to hedge at this time, as the loonie value will be fairly non-volatile for the long term. However, if you are just buying ETFs, and still want to hedge, then purchase the currency neutral option.

Poker_Star
Poker_Star

Canada has also diverged with the US on interest rates and--assuming the US ever raises rates--will suffer devaluation if they don't raise as well

Bidwell
Bidwell

Buy eth

RavySnake
RavySnake

I see.

I was just starting to panic with how it started shooting up and thought id be fucked soon.

ok ill keep buying non cad hedged s&p etfs

massdebater
massdebater

Adie is such a qt

Playboyize
Playboyize

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