FX Hedging / Immunisation

One more idea for the community and something I would like Freetrade to adopt.

I am about analytics and investing. One thing I find frustrating is that my portfolio experiences FX p&l fluctuations - I understand why and that’s fine.

What I don’t like is that it’s ultimately a byproduct driven by the country the company i have invested has chosen to list in. I have not invested in the economic policies of that country - so why should my portfolio experience noise driven by this. Yes, you can get lucky and make a windfall gain, but you can also make a loss.

Investors from the UK will have lost 20% of their US shareholding over the last few months due to the relative strength of GBP over the USD. Sometimes that information is lost. People have already asked for this to be broken out - so i won’t go further into that, but I do support that idea.

What I would like Freetrade to do, is to create the ability to immunise my portfolio from currency movements. I am all about creating chargeable useful features for Freetrade, and naturally I believe this should be chargeable.

As a investor, I should have the option to have all my foreign currency exposure hedged by Freetrade. You could very easily set thresholds, when your investment ccy balance goes above a certain size it will get immunised. This level could be zero or £1000 or whatever, all balances above that level will get charged with a flat fee and maybe some basis point charge.

If I move my sipp across today, I want to know at some point I will be able to hedge all the FX exposures, or at the minimum USD.

Again something no one else offers - Freetrade - you will be worth gold if this occurs.

I guess you know that there are hedged ETFs that you can buy, which would accomplish part of what you want to do, although only at the ETF basket level, not at the level of individual stocks. But hedging is expensive. Essentially you’re asking someone else to take the currency risk for you – they have to make up the difference if the currency movement goes the wrong way for you, and they will want to be well paid to take that risk.

I subscribe to the theory that currency risk is fairly random, just as likely to help you as to hurt you, and balances out over the long term. Right now, with the pound going up, our overseas investments are disadvantaged. But in the second half of 2016, the pound dropped dramatically against the dollar, and our overseas investments benefited from a huge boost. Swings and roundabouts.

And hey, if the pound is high, that means it’s cheaper to buy overseas investments!

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No arguments with anything you have said. It’s a just a different perspective and one which Freetrade could capitalise on. The entire cost will be past on to the customer and Freetrade can easily hedge via institutional hedging solutions, just rebalance once or twice a day depending on volatility.

If you had someone come across with £1m ISA or SIPP and offered this service - I’m sure you’ll get a fraction of the customers that will pay for it. And chances are, if you have customers that want this feature - you’ll get more of the £1m portfolios moving across.

Also for SIPPs - you are investing in your retirement. So as you approach retirement age, you may still want the luxury of self picking your stocks but I doubt you would be happy for a 20% loss driven by FX movements. But agree it’s random, same reason you may choose a fixed rate mortgage versus a variable one.

Regarding your comments regarding ETFs - completely agreed. But you have to realise, you pay for this service already in the management cost of that ETF. So once autopilot comes onboard, you are ultimately creating a self select ETF - so makes sense you are able to implement this Fx management solution too.

High value of GBP is perfect for buying now, but no good for stocks you already own. And if you hedged you Fx balance - there is nothing stopping you from buying the cheap stocks now and benefiting from the GBP strength.