Dollar hedging

[probtrader]

I am looking for a way to hedge my USD equity portfolio against a loss of value of the buck towards the EUR (yes I know, I am terribly late... but I am afraid there is more room to go).

I believe one way to do this is to short a dollar index future, although I am not sure there exists such securities on UDX. Another way is to buy EUR/USD put options but I am not familiar with these products and I believe there is a minimum cut that could be higher than my cash portfolio.

Can anybody share some hands-on experience?

[HenryTo]

probtrader,

We're moving towards that direction. Ideally, anything that we come up with will be a portfolio based on a mix of asset allocation and stock market timing, or in other words, a portfolio that, hopefully, a "Global Macro" hedge fund manager can be proud of.

That is the main reason why I am evaluating several different software packages right now (e.g. Reuters EcoWin). Reuters EcoWin is one of the cheapest software packages around but it is still $1,225 a month - something that is hard to justify given the subscription base that we currently have. There is no way I could recommend a portfolio based on a mixture of foreign bonds, equities, and other foreign tradeable "stuff" without the tools needed to analyze them. e.g. Many sites have "advised" folks to purchase EM or BRIC mutual funds over the last few years, but if you ask them to post up a historical P/E chart (if they use fundamental analysis) or a price/volume chart (if they use a combination of technical and momentum analysis), they are not able to do it. To me, a "gut feel" is not acceptable when it comes to constructing a portfolio. Or put another way, if you're trying to solicit money to start a "global macro" fund, telling your potential investors that you have done well without having the corresponding systems, models, or connections will not cut it - even if you have beaten the MSCI EAFE + EM by a substantial margin over the last several years.

In the meantime, I am confortable with the systems/data we have in place for the domestic universe. A better way to do this would be to subscribe to a system like CompuStat or Capital IQ to get easy access to individual security data - not just on a snapshot basis but on a historical basis as well. From an indvidual security level, one could then also construct customized broader industry or sector indices, or even rebuild the S&P 500 on a historical basis, assuming that data for merged or bankrupt companies are also available. At this point, I have no plans to do this. However, I do have plans to evaluate their software and may actually end up purchasing it if they also offer global equity data within a reasonable price range.

Best regards,

Henry

[probtrader]

Henry,

Given the macroeconomic scope of your researches and the focus of this website on risk reduction, wouldn't make sense to extend the set of your signals to the global markets rather than just the Dow?

[HenryTo]

Also, look at the earnings composition of your company as well as the geographical allocation of your mutual funds, if you're holding any.

Fully 40% of earnings on the S&P 500 now come from overseas, so there is already a natural hedge. If you're inclined to invest in equities going forward, I would think about Asian equities rather than European equities - as I don't believe the Euro will be in any better shape or form versus the dollar going forward, not to mention the Singapore Dollar, the Korean Won, or the Chinese Yuan.

Most U.S. investors are still underweight Asian equities, even though their international allocation has been increasing dramatically over the last 5 years. This can be seen in the increasing Eurocentric "drift" in the MSCI EAFE index as well as the international allocation of many popular funds, such as American Funds EuroPacific and Dodge & Cox International.

My sense is that buying Asian stocks/funds excluding Japan would be a great way to hedge your US domestic holdings going forward.

[nodoodahs]

The USDX traded contract is primarily EURO (56% approx). If you're inclined to use the ForEx futures, perhaps you might be better off going long 2-3 selected currencies rather than short USD contracts.

Check out FRED II on my links page and look at their trade-weighted dollar index, some of the heavyweights there might be good candidates, just be respectful of any correlations with U.S. economy (Peso? Won?) when choosing.

Best of luck!
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[rffrydr]

There does, but the Index exposes you to Yen and commodities currencies. Ratio spread the euro: as you said, you're late and your insurance is "fixed" at current values while you get some protection on the upside and don't loose (really) on the down.
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