FX Hedging

Ideas šŸ’”
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Just a suggestion, as this is a UK start-up assume most investors will have GBP as main currency in their accounts.

So if an account holder wants to buy some shares in a US stock in USD using their GBP, a nice option will be to be able to simultaneously buy the equivalent GBP/USD so that any FX fluctuations wonā€™t effect the value of the position. Thinking if the dollar tanks for whatever reason or vice versa.

Whats Freetrades position on this? Apologies if this has already been raised / discussed, couldnā€™t see any other threads on it.

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We donā€™t currently have any intention to incorporate FX trading into the platform. However we will be releasing APIs, and considering IFTTT integration, so maybe this is something someone else might look to incorporate by linking to someone who does offer this.

Worth noting though that this would be a relatively simplistic approach to hedging, as you can have plenty of USD exposure without owning USD stocks - the reason the FTSE 100 tends to tick up whenever GBP weakens is because their earnings are significantly USD (or USD linked). Taking this approach you would also miss out on any upside from FX movements.

However hedging in general is an interesting topic, and would be fascinated to hear others views on its place in a portfolio (I personally donā€™t bother, and instead focus on diversification).

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I have a few US shares, In a way they are a hedge against the pound falling. They go up without actually going up every time thereā€™s a brexit related disaster :smiley:

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More on FX hedging below, but to start with: Rob, i totally agree about the implicit indirect impact of USD when investing in a multinational. However, as you infer, this is something that is super tough to account for. I guess itā€™s similar to having unavoidable exposure to US politics/regulations given global interconnectedness. On the other hand, explicit currency exposure (e.g. Buying a share of Apple via USD) can be controlled.

Regarding the portfolio what is quite interesting is that US investors typically have a greater home bias than UK investors, i.e. For equities they invest approx 70% in domestic names versus UKā€™s 50% in domestic names. This results in lower hedging demand from US investors, but should raise an eyebrow for a UK investor.

Investment time horizon is quite crucial. It is generally a better idea to have at least some hedging in place for a shorter horizon than a longer one. Analysts tend to hold the view that currency movements should be almost flat through a long time horizon (>10yrs) - quite logical i.e. greater statistical probability of a flat move over a longer than shorter period. Economic cycles will also factor in here. So definitely a point to consider.

FX hedging is an interesting and often overlooked topic, not just with retail investors. While you might be tempted to want to be fully hedged, it is worth noting that youā€™re then taking a bet on GBP strength relative to the foreign currency. The closest to trying to take a neutral view would be to hedge 50% of the foreign currency, or what is referred to in the FX hedging space as the hedging ratio of ā€œleast regretā€.

To hedge the foreign currency you essentially need to be short the foreign currency versus your home currency for the same period as your investment, continuously. You can do this by either using instruments like forwards, options or CFDs (there are costs of course - interest, spread, rolling over contractsā€¦). However, another way is to simply buy into a hedged ETF. You could buy hedged and unhedged units (if available) to create a mix to suit your appetite for currency risk.

In saying that, a question for the FT team: Do you anticipate making hedged ETFs available at some point? Would be great to have that option. Operationally far easier than running a separate hedge and probably cheaper.

Well, Iā€™m beginning my contribution to the community with a fairly length post, but purely out of child-like anticipation for the release. :smiley: Happy Friday all.

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Welcome to the community, pleasure to see new faces people :slightly_smiling_face:

This is because the US market objectively is the locomotive for global technological advancement and innovations. I would argue that 50% portfolio in the UK stocks is significantly worse hedging/diversification than 70% in the US. In fact, most of the US-listed companies are exposed to the entire world whereas many of the UKā€™s are purely national. And NYSE has got BABA, BIDU, etc. which could be considered as emerged market stocks too.

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Good point - however a lot of FTSE 100 is very global too: Unilever, Diageo, Shell. Not quite Google/Amazon but still very compelling companies.

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Saw @CTE getting stuck in to this one over at Monzo, thought it was worth sharing #StaySafeOutThere

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Any chance Freetrade could make FX hedged ETFs available? With GBP so low, getting exposure to unhedged foreign ETFs now is a no-go for me, despite the attractive entry point

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