Does it make sense to continue with the same strategy with this JPY/USD rate?

[sutebayashi]

What we have now in the currency market is not extreme volatility - that is something different.
You are suggesting only that because the yen is weak relative to a certain prior point in time that this is “extreme”.

Some would say rather, that the cavalier approach to monetary and fiscal policy displayed by Japanese policy makers in recent years is what is extreme.

The idea of buying staggered amounts of foreign assets in a hedged fund, effectively locking in the currency exchange rate at the time of each purchase, is interesting. It is at least better than making a lump sum purchase in which you get only one chance to be right.

Still, I have issues with the exit strategy, and cost.

It seems like it would be a management headache to keep track of when each individual purchase was made, and have a plan to sell that chunk of your position in the hedged fund, if the yen moves back to a certain level.

What is the level? 140, 130, 120, 110, 100? If your level is hit you are going to jump to your account and put in your ETF sell order? What if you miss the timing?

This is while, all the while, the funding cost for those currency hedges is relatively high now, given the interest rate differentials between the yen and other major currencies has widened.

(Also I am in developed market and developing markets, so I am not exposed to only the USD dollar, although it’s the big one.)

Originally a currency speculator before I could become an investor, I like to keep my currency speculation explicit and separate. (Most here would say I am crazy to even speculate and will eventually lose money.)

But imagine, or actually open a forex trading demo account, and put on a USD/JPY short position. The account will tell you how much your profit / loss is, and how much it is costing you to maintain that position. This year in my forex speculation, I have made roughly 1/3 of my profits from collecting swap points, which is due to the interest differential. The swap has been quite fantastic recently… but when you buy your JPY hedged product, you will be paying the cost, rather than receiving it.

My forex speculation is on smaller notional principal than with my investments, so when I imagine what it would cost me to hedge it, it is quite a significant cost indeed, with little sign of significant cost reduction in the near future.

That makes me think that the strategy is not an attractive one, unless the entry timing is good and you see a quick move towards your target yen rate. But if I want to hedge against currency risk (or speculate) like that, I do it in a forex account. (That’s just me, I know most people are not probably having forex accounts.)

[zeroshiki]

I think the main disagreement here is a fundamental difference in opinion in whether or not having a currency neutral index fund is possible (what does this even mean for an all world fund?). OP thinks that it is possible to do this when in reality what the fund manager is doing is doing a hedge on the value of the fund by buying currency forwards to simulate USD neutrality. This adds to the cost of the fund and drags its overall value down in the long term. If you accept that this is whats happening then the concept of the hedged fund becomes less appealing.

[alberto]

Well, we are already repeating all the arguments again and again. I think everything was already said about this, so I will try to summarize it with very netural words so that there is nothing wrong:

This 26-year chart shows that at this very moment our JPY are worth less than at any point in the last ~30 years with a substantial deviation:

This 5-year chart shows the effect the currency had if you were buying MSIC-kokusai with JPY: big difference compared to the original index.

What will happen from now on? Nobody knows. But we know what will happen for each scenario with the options we have been discussing:

• If JPY/USD continues depreciating further, you will get additional gains with the unhedged alternative

• If JPY/USD appreciates back to historical values, you will get additional losses with the unhedged alternative

• No matter what happens with JPY/USD, you will get the approximate MSCI-kokusai behavior with the hedged alternative

[Deep Blue]

A longer term chart shows a different story.

The trend from 1970 to 2010 lasted 40 years (yen strength)

This current trend (yen weakness) has lasted less than 15.

[alberto]

Fair enough.

[goran]

Fair enough.

[TBS]

I think everything was already said about this, so I will try to summarize it with very netural words so that there is nothing wrong:
...

• No matter what happens with JPY/USD, you will get the approximate MSCI-kokusai behavior with the hedged alternative

Hey, it's been 13 pages of people trying to explain this already, but lets try again...

A hedged ETF is not guaranteed to approximate the performance of the base index valued in the local currency of the equities. Look at these graphs from MSCI comparing various global indexes in their equities' local currency, in USD, and when a USD hedge is taken:

All three graphs show behavior nothing like what you insist in the quote above. The deviation of the hedged version away from the local currency index can be as large as the deviation of the USD-based (unhedged) version of the index, and in either direction. The reason is outcome of hedging depends on the trajectory of interest rates and actual FX rates after the investment is made.

And none of these graphs account for costs that drag on the actual performance of hedged ETFs in practice (higher management fees, hedging transaction costs, tax inefficiencies etc...)

Alberto - it's time for you to go away and do some homework to understand what you've actually bought.

[alberto]

Hey, it's been 13 pages of people trying to explain this already, but lets try again...

A hedged ETF is not guaranteed to approximate the performance of the base index valued in the local currency of the equities. Look at these graphs from MSCI comparing various global indexes in their equities' local currency, in USD, and when a USD hedge is taken:

All three graphs show behavior nothing like what you insist in the quote above. The deviation of the hedged version away from the local currency index can be as large as the deviation of the USD-based (unhedged) version of the index, and in either direction. The reason is outcome of hedging depends on the trajectory of interest rates and actual FX rates after the investment is made.

And none of these graphs account for costs that drag on the actual performance of hedged ETFs in practice (higher management fees, hedging transaction costs, tax inefficiencies etc...)

Alberto - it's time for you to go away and do some homework to understand what you've actually bought.

I have posted this many times already, have you even seen this? What do you have to say about THIS?

[Deep Blue]

Two years is far too short a time frame to be investing in equities for, and hence no sensible conclusions can be drawn from looking at a two year period.

[alberto]

Fair enough.

Why the surprise? The more data we have, the better (although that's really old data and nothing remotely similar has happened in the last 30+ years). And the conlcusion doesn't change at all:

If JPY/USD continues depreciating further, you will get additional gains with the unhedged alternative
If JPY/USD appreciates back to historical values, you will get additional losses with the unhedged alternative
No matter what happens with JPY/USD, you will get the approximate MSCI-kokusai behavior with the hedged alternative