Unhedged Foreign Bond Funds

For years I've been a subscriber of Don Steinmann's free Investment Tip of the Week. Every weekend he sends out a short newsletter by email with usually contains a helpful quick tip or food for thought. Last week's edition was no exception. In it he provides some interesting insight on how to hedge against the falling dollar:

A big movement in the investment industry over the last few years has been about hedge funds. In fact I was surprised to learn that among very wealthy investors (those with $10 million or more to invest) they have more money in hedge funds than in straight common equities. The whole idea of hedging can be an attractive one. Diversify into other types of investments, other currencies, invest on the short as well as long side and protect yourself. Though it probably won't lead to a 50% gain in any one year, it can help prevent a 50% loss.

That's all fine and good for the very wealthy, but what about the average Jane and Joe? Well there are ways to hedge that require very little money. Currency hedging is one of the easiest to do. Let's say you are concerned about the drop in the US dollar (or whatever your home currency is) and you want to protect yourself against a really big drop. Wealthy investor can go to a hedge fund, or directly to the currency markets. But other investors can hedge too, by buying into a foreign bond mutual fund. You have to make sure the fund is 'unhedged'.

You want to directly participate in the moves of the currencies in that fund. You'll earn some interest on the bonds, and also participate if the dollar declines versus the other currencies in the fund. Of course if the dollar increases in value, the fund will decline. But if the dollar is rising, yields on domestic bonds and probably stocks, will be on the rise offsetting those declines. Get a little, give a little. Hedging. T. Rowe Price, PIMCO and American Century among many others have unhedged foreign bond funds.

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