Hedging currency risk with dollar mutual funds – Nairametrics
In light of the free fall of the national currency, it may not be unlikely that investors will be racking their brains looking for ways to protect their investments or assets from the impact of the fall. One way to do this can be through the various dollar and euro funds in the Nigeria mutual fund space.
What is currency hedging?
Just as you buy life or auto insurance to protect yourself against unforeseen circumstances, there are steps you can take to reduce the effects of currency fluctuations. Thus, currency hedging is an attempt to reduce the effect of currency fluctuations by investing in securities or assets whose value increases or decreases with changes in the exchange rate.
Reason for investing in Dollar / Euro funds
One of the reasons, if not the only one, that people would like to invest in dollar funds in Nigeria should be to use them to hedge currency risks. In the various prospectuses and infomercials, investment managers explain to investors the beauty of dollar funds as a way to diversify currencies, prevent devaluation and, of course, generate good returns.
According to Stanbic IBTC, “The Stanbic IBTC Dollar Fund aims to provide currency diversification, income generation and stable growth in USD. It seeks to achieve this by investing a minimum of 70% of the portfolio in high quality Eurobonds, a maximum of 25% in short-term USD deposits and a maximum of 10% in USD equities approved and registered by the Securities and Exchange Commission. from Nigeria.
To support their Nigeria Dollar Income fund, Chapel Hill Denham says: “The Fund offers unitholders the opportunity to invest in securities denominated in US dollars while ensuring portfolio diversification against the devaluation of the national currency. The proceeds of the Fund will be used for investments in Eurobonds, money market instruments and foreign equities.
Likewise, Cordros Asset Management Company has this to say about its Dollar fund, “The Cordros Dollar Fund is a mutual fund that allows you to invest and generate returns in US dollars in a convenient way. The fund invests in securities denominated in US dollars such as sovereign Eurobonds, corporate Eurobonds, money market instruments and other listed corporate Eurobonds. The goal is to offer you competitive returns compared to an average home bank account.“
The Nigerian mutual fund market is teeming with dollar and euro funds that investors could use as an antidote or as a hedge against currency risk. Here is the list of Dollar / Euro funds in Nigeria.