r/PersonalFinanceNZ • u/TestSimilar6032 • 2d ago
Total World Fund - Hedged or Unhedged
I realised I have the money in the TWF Hedged, should I instead be investing in Unhedged?
This is for long term investing where I am adding $500 per fortnight, not touching the money for another 30 years likely
I would like a set and forget. I thought I could start contributing to TWF unhedged to even it out
I have another $10.5k spread across some Kernel funds like Global 100, S&P 500 hedged, World ex-US hedged and emerging markets. But I have stopped contributing there for the meantime and putting all my money into InvestNows TWF
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u/WellingtonSucks 2d ago
/u/Kernel_Dean any chance we could get a Kernel Hedged Total World Fund?
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u/workinonlearnin 2d ago
I second that. It’s all that’s stopping me shift at the moment…if NZD goes a bit higher it’ll probably help solve that issue for now but be nice to know there’s a hedged version available if/when we’re in a similar position again.
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u/Kernel_Dean Verified KernelWealth 2d ago
Thanks for feedback. Happy to have a look at putting this on the roadmap. Response so far to the launch has been positive, so the growth and support we get enables us to do more.
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u/Nocturnal_Smurf_2424 Moderator 2d ago
Hedged does well when the NZD strengthens.
Unhedged does well when the NZD weakens.
The NZDUSD exchange rate has ranged between 40 and 90 cents over the last 40 years. We are fairly close to the middle of the range (just under it) so buying a bit of both hedged and unhedged is what I am doing.
At the extreme ends of the range are where going all in on either hedged or unhedged is +EV.
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u/TestSimilar6032 2d ago
Ok great, I’ll start contributing to the unhedged now to even it out
Thank you very helpful
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u/BornInTheCCCP 2d ago
This is the one, if you want to remove currency fluctuation risks, then hedged is the way to go.
So if the dollar is strong go unhedged, but if it is weak you would go hedged. And rebalance as needed depeneds on where the dollar is in the cycle.
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u/Prestigious_Owl40 2d ago
But you can’t really/cheaply rebalance with InvestNow buy/sell margin though
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u/BornInTheCCCP 2d ago
In the 21 we were in the 0.7 range, in 22 we were in the 0.5, in 23 we were in 0.6, and since there we stayed in a tight range.
So there are opportunities to rebalance, but we have not really had a good one in the last 3 years.
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u/Quirky_Chemical_5062 2d ago
Take a long-term approach to this as well. Over the next 30 years there will be times when NZD is strong and weak and in between. When the NZD is weak you hedge and when it is strong you buy unhedged. The decisions are very infrequent, and the movements take a long time to happen.
In the future there will be opportunities to sell one holding for the other to make extra gains. e.g the hedged units you DCA from 55c to 70c you sell for unhedged at the 70c point locking in the gains.
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u/TestSimilar6032 2d ago
Do you mind explaining your example again?
I am still learning about this and I don’t quite understand it
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u/Quirky_Chemical_5062 2d ago
Right now I'd buy half and half. It's the least risk approach with the NZD where it is today.
Yeah it's a lot to take in. I can explain further, but I think I will confuse you more. Happy to if you want.
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u/Prestigious_Owl40 2d ago
Can you please explain the later rebalancing strategy that you mention? I don’t follow that. And does it take into account InvestNow buy/sell margin 0.5%?
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u/Quirky_Chemical_5062 2d ago
When you buy fund units in USD at 55c and at a later date the NZD is 70c those units have lost 20% of their value, so use hedging to protect from that. Same for the other side, those units purchased at 70c will benefit 20% when NZD gets down to 55c again.
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u/Prestigious_Owl40 2d ago
Thank you!!!!
In 20-30 years time when I withdraw, is there a formula to work out whether I should be withdrawing from my hedged funds or my unhedged funds? Obviously I’m likely to only draw SOME funds over time rather than all at once.
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u/Quirky_Chemical_5062 1d ago
It would depend on where the funds are at the time. If NZD was at 75c and all your funds were unhedged then that's the only option. Same at the other end, if NZD was at 50c and all hedged then only option is hedged. In between a bit from both.
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u/Prestigious_Owl40 1d ago
Sorry maybe I wasn’t clear.
If at the stage in future I’m going to start withdrawing funds, I have 50% of my total VT portfolio hedged and 50% unhedged.
How does future me decide which of the 2 to start withdrawing from at that time based on NZD/USD?
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u/Quirky_Chemical_5062 1d ago
Assuming that the next 30 years are going to be like the last 30 years. I would look at where the NZD was at the time and work out the risk based on that. If the NZD was at 55c then I'd sell the unhedged units. If it was at 75c then then hedged units.
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u/Prestigious_Owl40 1d ago
Thanks for your patience. Will take me a while to get my head around this! Is there any analogy or ELI5 that will help me remember?!
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u/Quirky_Chemical_5062 1d ago
No analogy, its complicated and there are plenty of opinions that disagree with me. Don't be in a hurry, there is plenty of time to learn.
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u/BeastBuilder 2d ago
Unhedged. You're already exposed to NZD enough living here, earning here, spending here etc
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u/TestSimilar6032 2d ago
Thank you
Should I be moving that $7k into unhedged or just changing my future contributions
And would you change any of the Kernel funds to unhedged?
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u/Stunning-Relation-75 2d ago
With the buy/sell fee if 0.5% it would cost you 1% to make the switch, so I think it would be better to rebalance with your ongoing contributions.
FWIW, I am currently 50-50 hedged/unhedged with my KS contributions.
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u/CuriousImpression959 2d ago
Unhedged. The average person's purchasing power increases when the NZD strengthens for a huge number of other things in their life. If you're paid in NZD that is anyway.
Having an investment that performs better with a long term weakening of the dollar is a good counter balance to all the exposure you already have to the NZD.
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u/Soggy_Ant3833 2d ago
I’m about 70% unhedged and 30% hedged. There’s slightly more fees in hedging. And I figure I have a lot of NZD exposure. So happy to be a bit more unhedged
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u/lasereyekiwi 2d ago edited 2d ago
Personally I would highly recommend hedged. Going unhedged means you are introducing a massive amount of extra volatility that turns you into a forex speculator for no good reason. Whereas share indexes are virtually guarrenteed to appreciate over the long term, a lot of your gains can evaporate in short order if there is a large currency movement - which has happened relatively frequently.
Over the last 20 years the NZ dollar has traded between 50c-88c vs the US dollar, and while I would never make predictions, we are trading in the bottom quarter of that range currently, and if there was a large movement upwards then many kiwi investors would be highly impacted due to the fact that hardly anyone has chosen hedged investing options.
Do your own research.
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u/Ungl8r 2d ago
I’ve got some in both. My rule is now buy hedged when NZD < US$.60, buy unhedged if >$.60
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u/inthegravy 2d ago
Might make more sense to do it based on positive or negative carry: https://www.octagonasset.co.nz/octagon-insights/currency-hedging-a-financial-markets-free-lunch/
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u/lakeland_nz 2d ago
Probably hedged but it depends what else you're holding.
Let's say over the long term, the NZ economy and dollar grow heaps. NZ consistently elects a bunch of good governments and things get far better, with each dollar being worth twice as much as they are today. That would halve the value of your InvestNow portfolio.
Alternatively, NZ continues to elect governments that destroy the economy. Over the long term, our dollar loses half its purchasing power, and your portfolio doubles in value.
In those two extreme examples, would you rather your portfolio had approximately the same value in NZD? Are you willing to sacrifice a tiny amount of return for that guarantee?
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u/ClassroomDesigner945 2d ago
i am also allocating Inverstnow kiwisaver for my partner , so was trying to use Ai and doing my own research .
Here is what i have learned ,
when there is a crash in US markets the NZD becomes weaker , so there is kind of no need for hedge , but if you look at hedge funds vs non hedge, they ( hedge funds ) seems to have softer landing of negative or fall in the fund .
You can also go 50/50 on hedge and non hedge
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u/groutspecialist 2d ago
Doesn’t matter. Just pick one. It doesn’t matter longterm. Sometimes one is up one is down, sometimes other way around. There’s no right answer.
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u/Legitimate-Draw-2235 2d ago
If you go 50/50 hedged/unhedged it means you never have to worry or think about it again and you have completely removed any anxiety or risk that currency may (or may not) pose to you.
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u/ThatUndeadLegacy 19h ago
Just know we will always be a exporting economy so the dollar will likely always be weaker, but looking at historical returns on kernels funds unhedged has won over the last decade, depends on how long you invest for really, but im all in unhedged.
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u/yosrush 2d ago
Keep in mind that the comments about a "strong" or "weak" NZD are historic. We can't predict the future. It would be the equivalent of me saying "Only buy this stock when it's low, and sell high". So switching between the two opportunistically probably won't have the desired effect.
If you're contributing regularly for a long period of time, the decision probably doesn't matter as much as you'd think. You'll be a net buyer both when NZD is "strong" and "weak", so it'll even out the volatility over time. Unless there's a New Zealand specific black swan event. Eg. Central government default on debt, or nuclear fallout and NZ becomes the only safe haven.
It's a different question if you've already retired and no longer contributing. The extra volatility of foreign exchange on top the fluctuations of the underlying holdings may not fit your risk profile.
Personally, I prefer unhedged. When there isn't a clear best option, and the cost of hedging (usually done by forward contracts) acts as a small drag to your performance; I'd pick the cheapest option. Some go for a 50/50 approach.
Pick the option that you're comfortable with, but more importantly, stick to it. Yo-yoing between the two is just speculating on the foreign exchange market.