Exchange Market Volatility Is Too Scary? Who Is The Most Injured?

American investors who bought European stocks a year ago should have a return of more than 10%, but if they did not hedge against the depreciation of the euro, all of their profits or even more wealth might have gone "naught".

The return of exchange rate volatility, which is very large and often can not be predicted, is prompting stock market investors to turn to professional managers again to protect their stock market profits by the so-called "Currency Overlay" strategy.

Unlike stock market investors, stock market investors usually do not hedge against exchange rate risk.

"Money management outsourcing" refers to outsourcing the monetary risks of global portfolios to specialized institutions.

Managers who adopt this strategy eliminate exchange rate risk by opening or closing currency forward contracts in accordance with the currencies used by investors.

This strategy became popular in the mid 2000s, when foreign investors in the US stock market relied on it to hedge against the sharp depreciation of the US dollar.

But during and after the financial crisis,

The declines are slowing and the interest rates of all countries are approaching zero, and the strategy of making use of spreads between major currencies has become increasingly difficult.

But now, according to data from the largest number of fund companies using the exchange rate wind control strategy, this strategy is becoming a "meat and potatoes" again.

Jeremy Schwartz, head of research at WisdomTree, a ETF managing company in New York, claims that in the market where currencies tend to depreciate, their stock market performance is usually better, so hedging is justified.

90% of WisdomTree customers come from the United States.

Wood-Collins says only about 10% of his clients are seeking returns.

And before the financial crisis, the ratio was around 50%.

Another big change is that most of these increases are driven by US investors.

American investors used to invest mainly in domestic investment, but during the time when the US dollar depreciated by 40% in 2001-08, many people diversify their overseas assets.

At the time, it was profitable to invest overseas without hedging.

But with the US dollar close to 12 year high and expected to continue to appreciate, these investors are faced with the risk of huge losses due to potential exchange rate exposure.

In the nine months ended July, the US pension fund estimated a loss of US $1 trillion due to the strength of the US dollar.

The largest independence in the world

The institution Record Currency Management first introduced the "currency management outsourcing strategy" in the middle of 1980s.

Its assets managed by the company have exceeded the peak before the financial crisis and reached a record high of $56 billion 600 million in June.

A number of investment management companies tracked by data provider eVestment have attracted $2 billion 300 million inflow into the currency management outsourcing service so far this year, and outflow $829 million in 2014.

Record CEO James Wood-Collins said: "we are in a more turbulent environment. We have seen the occurrence of major events, and these major events have caused the ups and downs of the market.

This gives investors further awareness of the impact of exchange rate fluctuations on returns.

In the past 2008-2009 years, Record's asset management scale was almost "cut short" because of the narrowing of spreads and risk aversion, prompting investors to lift the interest rate trading.

The so-called carry trade is that investors borrow low yield currencies to buy high yield, but high-risk currencies, which is precisely Record's expertise.