wisdomtree & currency hedging · for financial professional use only. myth of currency hedging:...
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FOR FINANCIAL PROFESSIONAL USE ONLY. FOR FINANCIAL PROFESSIONAL USE ONLY.
WisdomTree & Currency Hedging
FOR FINANCIAL PROFESSIONAL USE ONLY.
Currency Hedging in Today’s World
The influence of central bank policy
Gauging the impact currency has had on international returns
Is it expensive to hedge currency risk?
Thinking about when to hedge currency risk
What does dynamically hedged currency look like?
How to think about currency risk from an index construction standpoint
without necessarily hedging the exposure
2
FOR FINANCIAL PROFESSIONAL USE ONLY.
Central Bank Policy Divergence Potential to Signal a
Stronger Dollar, Especially versus the Euro and Yen
3
1 James Bullard, OMFIF Golden Series Lecture, May 23, 2013 Arrows: Indicates that central banks have announced monetary policy measures through2015 Dots: Indicates how aggressive central banks have been in easing monetary policy through both conventional and unconventional monetary policy easing measures through 2015 Source: WisdomTree, Relevant Central Bank Websites, Bloomberg. Past performance is not indicative of future results.
Federal
Reserve Bank of
Japan
European
Central Bank
Bank of
England
Central Bank Policy Pendulum
Tightening Bias Easing Bias What Does QE Accomplish1:
Higher inflation
expectations
Currency depreciation
Higher equity valuations
Lower real interest rates
FOR FINANCIAL PROFESSIONAL USE ONLY.
Currencies in the MSCI EAFE Index Complex
have Displayed Cycles that Average 8 Years
4
Source: MSCI as of 12/31/2015. Past performance is not indicative of future results. You cannot invest directly in an index.
0.75
0.95
1.15
1.35
1.55
1.75
1.95
2.15
2.35
Cum
ula
tive
Do
llar
Imp
act o
n M
SCI E
AFE
In
dex
Ret
urn
s DollarWeakens
Dollar Strengthens
Dollar Weakens
Dollar Strengthens
Dollar Weakens
Dollar Strengthens
Currency Trend Periods
Average Annual
Returns for MSCI
EAFE Currencies
Average Annual
Returns for MSCI
EAFE Local Equity
Markets
Dec 31, 1969 - Oct 31, 1978 5.1% 4.8%
Nov 1, 1978 - Feb 28, 1985 -8.1% 16.9%
Mar 1, 1985 - Apr 28, 1995 8.3% 8.7%
May 1, 1995 - Jan 31, 2002 -5.7% 7.7%
Feb 1, 2002 - Jul 31, 2011 5.2% 2.0%
August 1, 2011 - Dec 31, 2015 -5.9% 9.7%
Entire Period 1.1% 7.6%
11.2%
5.4%
7.6%
0%
2%
4%
6%
8%
10%
12%
Down Currency Trend Up Currency Trend All Periods
Avg
. An
nu
al R
etu
rn
MSCI EAFE Index in Local Currency (12/31/1969-12/31/2015)
FOR FINANCIAL PROFESSIONAL USE ONLY.
Strategic Question is Not: “Why Should I Hedge?”
But Rather Why Should I Wager on Currencies?
5
*Equity: Volatility of the equity prices denominated in their local currency, in this case EAFE FX. **Currency: Incremental volatility added to the local due to changes in the value of EAFE FX relative to the U.S. dollar.
***Currency + Equity: Volatility of the combination of both the local equity prices denominated in local currency as well as that of the EAFE FX relative to the U.S. dollar. Source: WisdomTree, MSCI, 12/31/69-12/31/15. Past performance is not indicative of future results. Subject to change. EAFE FX refers to the underlying currency exposure of the MSCI EAFE Index. You cannot invest directly in an index.
12/31/69-12/31/15 8.8% 7.6% 1.1% 17.0% 14.4% 8.4% 2.6% 0.04 0.23 0.18
3-Year 5.0% 12.3% -6.5% 12.6% 11.4% 5.6% 1.2% (0.03) 0.39 1.07
5-Year 3.6% 7.9% -3.9% 15.0% 12.2% 6.3% 2.8% 0.24 0.24 0.64
10-Year 3.0% 3.2% -0.2% 18.5% 14.9% 7.6% 3.6% 0.29 0.10 0.14
20-year 4.4% 4.9% -0.5% 16.7% 14.8% 7.4% 2.0% 0.04 0.12 0.17
EAFE
FX
MSCI EAFE w/
Currency
MSCI EAFE No
Currency
Average Annual Returns Average Annual Standard Deviation Incremental
Change in
Risk
Correlation
(Equities vs.
Currency)
Sharpe Ratio
MSCI EAFE
w/ Currency
MSCI EAFE No
Currency
EAFE
FX
MSCI EAFE w/
Currency
MSCI EAFE No
Currency
FOR FINANCIAL PROFESSIONAL USE ONLY.
Myth of Currency Hedging: It is Expensive to
Hedge Your Currency Risk
6
WT Intl Equity (Dynamic Hedge) refers to WisdomTree Dynamic Currency Hedged International Equity, WT Intl Equity refers to WisdomTree International Equity, WT Intl Small Cap Dividend (Dynamic Hedge) refers to WisdomTree Dynamic Currency Hedged International SmallCap Equity, WT Intl Small Cap Dividend refers to WisdomTree International SmallCap Dividend, WT Global ex US Hedged Dividend refers to WisdomTree Global ex-U.S. Hedged Dividend, WT Emerging Markets Dividend refers to WisdomTree Emerging Markets Dividend Analysis done at the index level only. WT stands for WisdomTree. WisdomTree International Hedged Quality Dividend Growth formerly known as WisdomTree International Hedged Dividend Growth, WisdomTree International Equity Index formerly known as WisdomTree DEFA Index Source: Bloomberg. Subject to change. Past performance is not indicative of future results. You cannot invest directly in an index.
-1.50%-0.59%-0.57%
0.17%1.13%
2.08%
4.40%
6.50%7.00%
11.12%11.56%
12.94%
-0.21%-0.18%-0.01%
0.10%0.30%
4.89%
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
An
nu
aliz
ed
Inte
rest
Ra
te D
iffe
ren
tial
sR
elat
ive
to U
.S.
Cost of Hedging Currency with 1-Month Forwards Primarily Based on Interest Rate Differentials (trailing 12 month ending 12/31/2015)
FOR FINANCIAL PROFESSIONAL USE ONLY.
10.88%
20.49%
-10%
-5%
0%
5%
10%
15%
20%
25%
Dec-88 Mar-91 Jun-93 Sep-95 Dec-97 Mar-00 Jun-02 Sep-04 Dec-06 Mar-09 Jun-11 Sep-13 Dec-15
Cu
mu
lati
ve In
tere
st R
ate
Dif
fere
nti
al
Cumulative interest rate differential (IRD) gained from hedging MSCI EAFE to USD (USD base; 12/31/1988 - 12/31/2015)
Interest Rates Contribution Value and Momentum Contribution
100% Passive Hedge Signal Overlay
One Was Paid Positive Interest Rate Differentials to
Hedge EAFE: Dynamic Hedging Increased Amount
7
Source: WisdomTree, MSCI, Record Currency Management, WM/Reuters. Interest rate differentials (IRD) based on 1-month FX forward prices. Euro legacy currencies proxied with Deutsche mark prior to 12/31/1998. Hong Kong Dollar excluded. ¹Currencies and exposures are reflective of the universe of the MSCI EAFE Index from 12/31/1988 to 12/31/2015. Past performance is not indicative of future results. You cannot invest directly in an index.
Paid to
Hedge
Cost to
Hedge
Whole Period Annualized IRD
100% Passive Currency Hedge¹ 0.38%
Multi Signal Overlay Currency Hedge¹ 0.69%
FOR FINANCIAL PROFESSIONAL USE ONLY.
Rolling Interest Rate Differential - EUR
8
Source: WisdomTree, MSCI, Record Currency Management, WM/Reuters. Interest rate differentials (IRD) based on 1-months FX forward prices. Past performance is not indicative of future results. You cannot invest directly in an index.
Paid to
Hedge
Cost to
Hedge
0.26%
0.20%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
Dec-91 Dec-93 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15
Ro
llin
g 3
yr A
nn
ual
ize
dIn
tere
st R
ate
Dif
fere
nti
al
3yr Rolling Annualized Interest Rate Differential (IRD) Gained from Hedging EUR to USD
12/31/1988 - 12/31/2015 - USD Base
Interest Rates Contribution Value and Momentum Contribution 100% Passive Hedge Signal Overlay
FOR FINANCIAL PROFESSIONAL USE ONLY.
Rolling Interest Rate Differential - JPY
9
Source: WisdomTree, MSCI, Record Currency Management, WM/Reuters. Interest rate differentials (IRD) based on 1-month FX forwards. Past performance is not indicative of future results. You cannot invest directly in an index.
Paid to
Hedge
Cost to
Hedge
0.34%
0.30%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
Dec-91 Dec-93 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15
Ro
llin
g 3y
r A
nn
ual
ize
dIn
tere
st R
ate
Dif
fere
nti
al
3yr Rolling Annualized Interest Rate Differential (IRD) Gained from Hedging JPY to USD
12/31/1988 - 12/31/2015 - USD Base
Interest Rates Contribution Value and Momentum Contribution 100% Passive Hedge Signal Overlay
FOR FINANCIAL PROFESSIONAL USE ONLY.
Correlation and Volatility of Europe and Japan
Currency, Equity
10
Source: WisdomTree, Bloomberg as of 12/31/2015. Past performance is not indicative of future results. You cannot invest directly in an index. Analysis done at the index level only. Investment universe is the respect MSCI regional indexes, start dates chosen to reflect longest available data, *JPY TWI: Japan Trade weighted Index which is the value of the currency vs. its major trade partners **EUR TWI: Euro Trade weighted Index which is the value of the currency vs. its major trade partners
12/31/69-12/31/15 21.1% 18.6% 11.1% 2.48% (0.07)
3-Year 13.4% 17.0% 7.8% -3.54% (0.63)
5-Year 14.0% 18.1% 7.9% -4.01% (0.66)
10-Year 15.5% 19.3% 9.5% -3.89% (0.62)
20-year 18.0% 18.1% 10.6% -0.06% (0.30)
MSCI Japan w/
Currency
MSCI Japan No
CurrencyJapan Currency
Average Annual Standard Deviation Incremental
Change in
Risk
Correlation
(Equities vs.
Currency)
-0.57
-0.26
0.18
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
70
75
80
85
90
95
100
105
110
Co
rre
lati
on
EUR
TW
I
Correlation of MSCI EMU Index and EUR TWI
Correlation MSCI EMU (No Currency) and EUR TWI EUR TWI
12/31/87-12/31/2015 19.9% 17.8% 10.4% 2.0% (0.08)
3-Year 15.7% 14.3% 8.5% 1.4% (0.14)
5-Year 19.6% 15.5% 9.3% 4.2% 0.21
10-Year 23.3% 17.6% 10.9% 5.6% 0.31
20-year 21.1% 18.8% 10.1% 2.3% (0.01)
Average Annual Standard Deviation Incremental
Change in
Risk
Correlation
(Equities vs.
Currency)
MSCI EMU w/
CurrencyEMU FX
MSCI EMU No
Currency
-0.39
0.06
-0.53
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
80
100
120
140
160
180
200
Co
rre
lati
on
JPY
TW
I
Correlation MSCI Japan (No Currency) and JPY TWI JPY TWI
FOR FINANCIAL PROFESSIONAL USE ONLY.
Signals Shown to Impact Currency Moves
11
Interest Rates Momentum Value
1. Interest rate premia exist due
to persistent macroeconomic
imbalances between
countries
2. Current account deficit
countries offer higher real
interest rates to attract foreign
capital into the economy
3. Exporters of capital are
rewarded via the interest rate
for taking on currency risk as
currency does not depreciate
by as much as implied by the
FX forward rate pricing
4. Signal operates at the short to
medium term horizon
1. Tendency for currencies to
appreciate following a
previous appreciation and
depreciate after a prior
depreciation
2. Pricing inefficiency
3. Herding speculators, flight to
safety as a result of market
shocks, delta hedging from
banks, and divergence in
market participants beliefs
about currency ‘fair value’
amplify currency trends
4. Signal operates at the short to
medium term horizon
1. Substantial exchange rate
deviations from fundamental
levels are unsustainable
2. Purchasing Power Parity (PPP)
recognized as a good
predictor of the long term
direction of the exchange
rate
3. Economic opportunities,
adjustments via terms of
trade, and central bank
interventions help revert
currencies back towards fair
value
4. Signal operates over the
medium to long term
Source: WisdomTree, Record Currency Management as of 12/31/2015
FOR FINANCIAL PROFESSIONAL USE ONLY.
Latest Currency Hedge Ratios by Signal and
Defining Rules of Each Signal
12
Source: WisdomTree, Record Currency Management as of 12/31/2015. PPP: Purchasing power parity.
Momentum Signal: When the 10-day moving
average of a currency’s spot price versus U.S.
dollar is weaker than the 240-day moving
average (a currency is depreciating), a hedge
ratio of 33.3% is applied to the Index.
Interest Rate Signal: If the implied interest rate in
the U.S. is > that of a targeted currency using
one month FX forward rates, a hedge ratio of
33.3% is applied to the Index.
Value Signal: A) If a currency is > 20%
overvalued against PPP level and until it crosses
PPP, the hedge ratio of 33.3% is applied to the
Index. B) When a currency is between 20%
overvalued and 20% undervalued and until it
crosses one of these levels, the hedge ratio is set
to 16.667% (or ½ of the signal total hedge ratio)
for the Index. C) When an individual currency is
>20% undervalued against PPP and until it
crosses PPP, the hedge ratio is set to zero to the
Index.
CurrencyValue Signal
Hedge Ratio
Momentum
Signal Hedge
Ratio
Interest
Rate Signal
Hedge Ratio
Total Hedge
Ratio
AUD 16.67% 33.33% 0.00% 50.00%
CHF 33.33% 33.33% 33.33% 100.00%
EUR 16.67% 33.33% 33.33% 83.33%
GBP 16.67% 33.33% 33.33% 83.33%
JPY 16.67% 0.00% 33.33% 50.00%
NOK 16.67% 33.33% 0.00% 50.00%
NZD 16.67% 33.33% 0.00% 50.00%
SEK 16.67% 33.33% 33.33% 83.33%
Overlay Ratio
FOR FINANCIAL PROFESSIONAL USE ONLY.
Hedge Ratio Evolution by Signal and Currency
13
Source: WisdomTree, MSCI, Record Currency Management as of 12/31/2015. 100% passive hedge returns and signal overlay hedge ratio from 12/31/1988 to 12/31/2015. Past performance is not indicative of future results. You cannot invest directly in an index.
-60%
-40%
-20%
0%
20%
40%
0%
20%
40%
60%
80%
100%
Dec-88 May-94 Oct-99 Mar-05 Aug-10
Cu
mu
lati
ve R
etu
rn
He
dge
Rat
io
EUR Exposure
Value Interest Rates Momentum 100% Passive Hedge
-40%
-20%
0%
20%
40%
0%
20%
40%
60%
80%
100%
Dec-88 May-94 Oct-99 Mar-05 Aug-10
Cu
mu
lati
ve R
etu
rn
He
dge
Rat
io
JPY Exposure
Value Interest Rates Momentum 100% Passive Hedge
-40%
-20%
0%
20%
40%
0%
20%
40%
60%
80%
100%
Dec-88 May-94 Oct-99 Mar-05 Aug-10
Cu
mu
lati
ve R
etu
rn
He
dge
Ra
tio
MSCI EAFE
Value Interest Rates Momentum 100% Passive Hedge
-60%
-40%
-20%
0%
20%
40%
0%
20%
40%
60%
80%
100%
Dec-88 May-94 Oct-99 Mar-05 Aug-10
Cu
mu
lati
ve R
etu
rn
He
dge
Rat
io
GBP Exposure
Value Interest Rates Momentum 100% Passive Hedge
FOR FINANCIAL PROFESSIONAL USE ONLY.
Cumulative Hedging Returns by Signal for USD
Base Exposure Currencies
14
Source: WisdomTree, Record Currency Management from 12/31/1988 to 12/31/2015. For EUR exposure, Deutsche mark is used prior to 12/31/1998. Past performance is not indicative of future results. You cannot invest directly in an index.
-60%
-10%
40%
Dec-88 Feb-92 Apr-95 Jun-98 Aug-01 Oct-04 Dec-07 Feb-11 Apr-14
Cu
mu
lati
ve R
etu
rn
EUR Exposure
100% Passive Hedge Signal Overlay Momentum Overlay
Interest Rates Overlay Value Overlay
-50%
0%
50%
100%
150%
Dec-88 Feb-92 Apr-95 Jun-98 Aug-01 Oct-04 Dec-07 Feb-11 Apr-14
Cu
mu
lati
ve R
etu
rn
JPY Exposure
100% Passive Hedge Signal Overlay Momentum Overlay
Interest Rates Overlay Value Overlay
-100%
-50%
0%
50%
100%
Dec-88 Feb-92 Apr-95 Jun-98 Aug-01 Oct-04 Dec-07 Feb-11 Apr-14
Cu
mu
lati
ve R
etu
rn
CHF Exposure
100% Passive Hedge Signal Overlay Momentum Overlay
Interest Rates Overlay Value Overlay
-60%
-40%
-20%
0%
20%
Dec-88 Feb-92 Apr-95 Jun-98 Aug-01 Oct-04 Dec-07 Feb-11 Apr-14
Cu
mu
lati
ve r
etu
rns
GBP Exposure
100% Passive Hedge Signal Overlay Momentum Overlay
Interest Rates Overlay Value Overlay
FOR FINANCIAL PROFESSIONAL USE ONLY.
Cumulative Hedging Returns by Signal for MSCI
EAFE Index Exposure
15
Source: WisdomTree, Record Currency Management, MSCI, OECD as of 12/31/2015. Past performance is not indicative of future results. You cannot invest directly in an index.
-11.15%
33.60%
35.34%
51.07%
11.43%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
Dec-88 Feb-92 Apr-95 Jun-98 Aug-01 Oct-04 Dec-07 Feb-11 Apr-14
Cu
mu
lati
ve R
etu
rn
Cumulative Return for Passive Hedging and Record Signal Overlay for Weighted MSCI EAFE Currency Exposure(12/31/1988 - 12/31/2015) - USD Base
100% Passive Hedge Signal Overlay Momentum Overlay Interest Rates Overlay Value Overlay
Unhedged50% Passive
Hedge
100% Passive
Hedge
Momentum
Overlay
Value
Overlay
Interest
Rates Overlay
Record Signal
Overlay
Relative Return 0.00% -0.14% -0.44% 1.13% 0.40% 1.54% 1.08%
Annualized performance (12/31/1988 - 12/31/2015)
FOR FINANCIAL PROFESSIONAL USE ONLY.
Annualized Excess Hedging Returns by Signal for USD
Base Exposure Currencies and Various Benchmarks
16
Source: WisdomTree, Record Currency Management, 12/31/88-12/31/15. Past performance is not indicative of future results. You cannot invest directly in an index.
Currency Exposure AUD EUR GBP CHF JPY MSCI EAFE Weighted
Unhedged -1.06% 1.28% -0.84% -0.13% 2.55% 1.13%
50% Hedged 0.46% 1.71% 0.01% 0.50% 1.92% 1.27%
100% Hedged 2.28% 2.40% 1.06% 1.45% 1.58% 1.56%
Currency Exposure AUD EUR GBP CHF JPY MSCI EAFE Weighted
Unhedged 0.86% 1.55% -0.33% -0.53% 2.09% 1.54%
50% Hedged 2.38% 1.98% 0.51% 0.11% 1.46% 1.68%
100% Hedged 4.20% 2.68% 1.56% 1.06% 1.13% 1.98%
Currency Exposure AUD EUR GBP CHF JPY MSCI EAFE Weighted
Unhedged -0.73% 0.28% -0.38% -1.72% 0.70% 0.40%
50% Hedged 0.80% 0.71% 0.47% -1.08% 0.07% 0.54%
100% Hedged 2.61% 1.41% 1.52% -0.14% -0.26% 0.84%
Currency Exposure AUD EUR GBP CHF JPY MSCI EAFE Weighted
Unhedged -0.22% 1.13% -0.44% -0.67% 1.88% 1.08%
50% Hedged 1.30% 1.55% 0.40% -0.04% 1.25% 1.22%
100% Hedged 3.12% 2.25% 1.45% 0.91% 0.92% 1.52%
Annualized value added to respective currency exposure using signal overlay (12/31/1988 - 12/31/2015)
Annualized value added to respective currency exposure using value overlay (12/31/1988 - 12/31/2015)
Value Overlay
Interest Rates Overlay
Annualized value added to respective currency exposure using interest rates overlay (12/31/1988 - 12/31/2015)
Signal Overlay
Annualized value added to respective currency exposure using momentum overlay (12/31/1988 - 12/31/2015)
Momentum Overlay
FOR FINANCIAL PROFESSIONAL USE ONLY.
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Inte
rest
rate
dif
fere
nti
al im
pli
ed
in 1
m
forw
ard
FX
rat
e (
USD
EUR
, % p
.a.)
US
D/E
UR
Sp
ot ra
te
Spot
Interest Rate Differential
Interest Rates Signal Example: USD/EUR
17
Source: WisdomTree, Record Currency Management, Reuters. Positions are opened and closed at subsequent month-end. Period: 12/31/1988 – 12/31/2015. Prior to 12/31/1998, the Deutsche mark is used for the euro.
Past performance is not indicative of future results.
100%
HR 0%
HR
Strong
EUR
Strong
USD
100%
HR
0%
HR
0%
HR
100%
HR
0%
HR
100%
HR
0%
50%
100%
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
He
dg
e
Rati
o
FOR FINANCIAL PROFESSIONAL USE ONLY.
0%
50%
100%
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
He
dg
e R
ati
o
0.8
0.9
1
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
US
D/E
UR
Sp
ot ra
te
(10
da
y m
.a.
cro
sse
s 2
40
da
y m
.a.
-b
elo
w t
o h
ed
ge
, a
bo
ve
to
un
he
dg
e)
Spot
10 day average
240 day average
100% HR
Momentum Signal Example: USD/EUR
18
Source: WisdomTree, Record Currency Management, Reuters, WisdomTree. Period: 12/31/1988 – 12/31/2015. Positions are opened and closed at subsequent month-end. M.A.: Moving average. Prior to 12/31/1998 the Deutsche mark was used for the euro. Past performance is not indicative of future results.
Strong EUR
Strong USD
100%
HR
100%
HR
100%
HR 100%
HR
100%
HR
0%
HR
0%
HR
0%
HR
0%
HR
0%
HR
100%
HR
0%
HR
100%
HR 100%
HR
0%
HR 0%
HR
FOR FINANCIAL PROFESSIONAL USE ONLY.
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
US
D/E
UR
Sp
ot ra
te(S
how
n w
ith +
/-20%
of
PP
P a
spart
of
the v
alu
e sig
nal)
Smoothed SpotPPPPPP - 20%PPP + 20%
Value Signal Example: USD/EUR
19
Source: WisdomTree, Record Currency Management, Reuters, OECD. Positions are opened and closed at subsequent month-end. Period: 12/31/1988 – 12/31/2015. Smoothed spot refers to a 20-day moving average calculation aiming to smooth anomalous price movements. Prior to 12/31/1998, the Deutsche mark was used for the euro. Past performance is not indicative of future results.
100%
HR
50%
HR 0% HR
50%
HR
100%
HR
50%
HR
0%
50%
100%
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014He
dg
e R
ati
o
Strong EUR
Strong USD
FOR FINANCIAL PROFESSIONAL USE ONLY.
Calendar Year Hedging Returns for MSCI EAFE
Currency Exposure
20
50% Passive Hedge 100% Passive Hedge Signal Overlay
27 27 27
12 12 13
15 15 14
3.87% 7.75% 6.15%
-3.20% -6.40% -3.36%
-0.06% -0.11% 1.22%
# of Value detract Years
Mean Value Add Year
Mean Value detract Year
Mean Year
Count of Full Years
# of Value Add Years
Source: WisdomTree, Record Currency Management, MSCI, OECD as of 12/31/2015. Past performance is not indicative of future results. You cannot invest directly in an index.
-15%
-10%
-5%
0%
5%
10%
15%
Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15An
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Calendar Year Hedging/Overlay Returns for MSCI EAFE
Weighted Currency Exposure12/31/1988 to 12/31/2015 - USD Base
100% Passive Hedge 50% Passive Hedge Record Signal Overlay
FOR FINANCIAL PROFESSIONAL USE ONLY.
Performance of MSCI EMU Index with Overlay
21
Since euro Inception of 12/31/1998. Past performance is not indicative of future results. You cannot invest directly in an index.
1-Year -1.42% 3.73% 8.83% 7.14% 9.82%
3- Year 5.20% 8.71% 12.13% 11.27% 12.22%
5-Year 3.05% 5.49% 7.76% 7.02% 7.49%
10-Year 2.25% 3.24% 3.93% 3.99% 3.09%
15-Year 2.41% 2.15% 1.61% 4.22% 1.42%
Since Euro Inception 2.61% 3.15% 3.41% 5.59% 3.08%
1-Year 16.10% 17.32% 20.04% 18.99% 20.19%
3- Year 15.70% 14.40% 14.28% 14.98% 14.31%
5-Year 19.63% 17.05% 15.47% 17.32% 15.47%
10-Year 23.28% 19.87% 17.51% 19.19% 17.64%
15-Year 22.39% 19.89% 18.52% 19.51% 18.51%
Since Euro Inception 21.76% 19.44% 18.34% 19.19% 18.33%
Annualized Volatility
Years to 12/31/2015 Unhedged50% Passive
Hedge
100% Passive
Hedge
Record Signal
OverlayLocal Returns
Annualized Returns
Years to 12/31/2015 Unhedged50% Passive
Hedge
100% Passive
Hedge
Record Signal
OverlayLocal Returns
FOR FINANCIAL PROFESSIONAL USE ONLY.
Performance of MSCI Japan Index with Overlay
22
Full data availability starting 12/31/1988. Past performance is not indicative of future results. You cannot invest directly in an index.
1-Year 9.57% 9.59% 9.50% 8.75% 9.93%
3- Year 10.17% 16.07% 22.08% 21.23% 22.99%
5-Year 4.38% 8.27% 12.12% 11.48% 12.95%
10-Year 0.91% 1.24% 1.35% 2.08% 1.10%
15-Year 2.12% 2.87% 3.40% 3.95% 2.48%
20-Year 0.37% 1.92% 3.21% 3.49% 1.15%
Full Data Availability -0.31% 0.70% 1.42% 2.15% -0.45%
1-Year 16.05% 17.63% 19.65% 18.96% 19.66%
3- Year 13.45% 14.70% 16.78% 16.48% 16.99%
5-Year 14.04% 15.54% 17.82% 17.41% 18.05%
10-Year 15.45% 16.85% 19.34% 18.43% 19.34%
15-Year 16.37% 16.74% 18.33% 17.76% 18.29%
20-Year 18.03% 17.35% 18.24% 17.85% 18.09%
Full Data Availability 20.76% 19.52% 19.75% 19.77% 19.56%
Annualized Volatility
Years to 12/31/2015 Unhedged50% Passive
Hedge
100% Passive
Hedge
Record Signal
OverlayLocal Returns
Annualized Returns
Years to 12/31/2015 Unhedged50% Passive
Hedge
100% Passive
Hedge
Record Signal
OverlayLocal Returns
FOR FINANCIAL PROFESSIONAL USE ONLY.
Performance of MSCI EAFE Index with Overlay
23
Full data availability starting 12/31/1988. Past performance is not indicative of future results. You cannot invest directly in an index.
1-Year -0.81% 2.06% 4.91% 2.72% 5.33%
3- Year 5.01% 8.45% 11.91% 10.43% 12.30%
5-Year 3.60% 5.67% 7.67% 6.86% 7.85%
10-Year 3.03% 3.45% 3.72% 3.82% 3.23%
15-Year 3.54% 3.24% 2.81% 4.42% 2.68%
20-Year 4.42% 5.05% 5.54% 6.62% 4.91%
Full Data Availability 4.34% 4.52% 4.54% 5.87% 4.33%
1-Year 15.24% 15.28% 15.99% 15.94% 16.01%
3- Year 12.64% 11.70% 11.40% 12.05% 11.40%
5-Year 14.99% 13.28% 12.16% 13.56% 12.18%
10-Year 18.48% 16.31% 14.79% 15.98% 14.89%
15-Year 17.46% 15.78% 14.87% 15.59% 14.88%
20-Year 16.74% 15.41% 14.89% 15.37% 14.79%
Full Data Availability 17.19% 15.72% 15.18% 15.63% 15.06%
Annualized Returns
Years to 12/31/2015 Unhedged50% Passive
Hedge
100% Passive
Hedge
Record Signal
OverlayLocal Returns
Annualized Volatility
Years to 12/31/2015 Unhedged50% Passive
Hedge
100% Passive
Hedge
Record Signal
OverlayLocal Returns
FOR FINANCIAL PROFESSIONAL USE ONLY.
Currency Impact Can Also Influence Different
Types of U.S. Equities
24
Source: Bloomberg, with data from 6/1/2015 to 2/5/2016. Data begins with the inception date of the WisdomTree Strong Dollar and Weak Dollar U.S. Equity Indexes. You cannot invest directly in an Index. Past performance is not indicative of future results. Index performance does not represent actual fund or portfolio performance. A fund or portfolio may differ significantly from the securities included in the index. Index performance assumes reinvestment of dividends but does not reflect any management fees, transaction costs or other expenses that would be incurred by a portfolio or fund, or brokerage commissions on transactions in fund shares. Such fees, expenses and commissions could reduce returns.
FOR FINANCIAL PROFESSIONAL USE ONLY.
Why Exponential Weighting? Increased Sensitivity
to How Stocks Reacted to Moves in the U.S. Dollar
S&P 500 constituents as of December 31, 2015 are weighted three ways:
Equal-Weighting: Every stock receives the same weight, but there is no change in weight based on the correlation of returns between stocks and the U.S. dollar.
Market capitalization weighting: Stocks with the greatest market capitalization receive the greatest weights, but there is no direct relationship between market capitalization and the correlation of stock returns with returns of the U.S. dollar.
Exponential weighting: Directly ties the correlation of returns of stocks to the returns of the U.S. dollar to the weighting. This example tilts more weight toward stocks whose returns had a higher correlation to the returns of the U.S. dollar, and less weight to stocks whose returns had a lower correlation to the returns of the U.S. dollar.
25
Sources: WisdomTree, Bloomberg, Matlab. Data as of 12/31/2015. Universe is the S&P 500 Index constituents. The left, vertical axis indicates constituent weighting within the Exponential Weight (blue line) and Equal Weight (orange line) examples. The Right vertical axis indicates constituent weighting within the Market Cap Weight (green line) example. The horizontal axis places the stock whose returns had the highest correlation to the returns of the U.S. dollar on the left and the stock whose returns had the lowest correlation to the returns of the U.S. dollar on the right. Since the blue line slopes downward smoothly from left to right, it is indicating a smooth relationship between correlation of returns to the returns of the U.S. dollar and constituent weight. Subject to change, You cannot invest directly in an index.
FOR FINANCIAL PROFESSIONAL USE ONLY.
Geographic Revenue Illustrates Strong Contrast
Between the Indexes
26
Sources: WisdomTree, FactSet, Standard & Poor’s. Data as of 12/31/15 when the indexes began their live performance calculation. Strong dollar refers to WisdomTree Strong Dollar U.S. Equity Index. Weak dollar refers to WisdomTree Weak Dollar U.S. Equity Index. Due to the selection rules of the WisdomTree Strong Dollar U.S. Equity index, stocks in the Energy and Materials sectors, tending to have returns that have exhibited significantly negative correlations with the returns of the U.S. dollar, are not eligible for inclusion. Past performance is not indicative of future results. You cannot invest directly in an index.
FOR FINANCIAL PROFESSIONAL USE ONLY.
Relative Weight Differentials in Strong Dollar /
Weak Dollar Indexes
27
Sources: Bloomberg, FactSet, Standard & Poor’s. Data as of 12/31/15. 1 Strong Dollar Tilts: Refers to Utilities, Financials, Consumer Discretionary and Telecommunication Services, where the WisdomTree Strong Dollar U.S. Equity Index exhibits an over-weight compared to the S&P 500 Index. 2 Weak Dollar Tilts: Refers to Energy, Health Care, Information Technology, Industrials and Materials, where the WisdomTree Weak Dollar U.S. Equity Index exhibited over-weights versus the S&P 500 Index. Energy was the exception and is considered a weak-dollar tilt because it is not included in the WisdomTree Strong Dollar U.S. Equity Index. Subject to change. You cannot invest directly in an index.
Strong Dollar Tilts1 Weak Dollar Tilts2
FOR FINANCIAL PROFESSIONAL USE ONLY.
Thinking about Currency’s Impact on Emerging
Market Equities
28
Source: Bloomberg, with data from 6/1/2015, the Inception Date for the WisdomTree Strong Dollar Emerging Markets Equity Index, to 2/5/2016. You cannot invest directly within an Index. Past performance is not indicative of future results. Index performance does not represent actual fund or portfolio performance. A fund or portfolio may differ significantly from the securities included in the index. Index performance assumes reinvestment of dividends but does not reflect any management fees, transaction costs or other expenses that would be incurred by a portfolio or fund, or brokerage commissions on transactions in fund shares. Such fees, expenses and commissions could reduce returns.
FOR FINANCIAL PROFESSIONAL USE ONLY.
Conclusion
What is an appropriate baseline exposure to currency exposure?
• Unhedged? (meaning holding the full amount of currency risk)
• Hedged? (meaning seeking to mitigate the full amount of currency risk)
• 50% Hedged? (meaning seeking to mitigate half of the currency risk)
• Dynamically Hedged? (letting a rules-based process determine how much
currency risk should be hedged on a currency-by-currency basis)
Marrying index construction with currency risk considerations
Client Feedback—we have a constant interest in how our clients are
thinking about currency risk and what they think about the potential tools
available to manage it
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