Currency-Hedged Mutual Funds: Financial Genomics at Work

Jul 11th, 2006 | Filed under: Portable Alpha & Alpha/Beta Separation | By:
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By: Alpha Male 

In a previous post, I used the human genome as an allegory for a financial investment (particularly a mutual fund).  I suggested that a mutual fund can be represented as a combination of cash, market beta, and alpha.  In conclusion, I argued that a US equity fund, for example, could also be represented by a fourth “gene”, a US dollar gene.  In June 9th’s Globe & Mail, columnist Keith Damsell illustrates how this concept is already being applied to US mutual funds being offered in Canadian dollars. 

(Canadian money manager) Phillips Hager & North Investment Management Ltd. launched the Currency-Hedged U.S. Equity Fund and the Currency-Hedged Overseas Equity Fund. Clients of the Vancouver fund company were leery of the over-heated Canadian equity market and wanted to invest overseas but wanted to mitigate currency risk, said PH&N president John Montalbano.

John Montalbano, financial geneticist, aims to use new technologies to turn off what he views as a potentially dangerous gene without damaging the rest of his fund’s genome.  Which begs the question, why stop at hedging currency?  Why not hedge out other factors that drive fund performance.  Like, say, the equity market itself

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