Hedging currency risk with dollar mutual funds

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In the light of the free fall of the domestic currency, it may not be unlikely that investors are scratching their heads looking for ways to shield their investments or assets from being impacted by the fall. One way to do that may be through the various Dollar and Euro funds in Nigeria’s mutual fund space.

What is currency hedging?

Just like you buy life or car insurance to protect yourself from unforeseen circumstances, you can take steps to reduce the effects of currency fluctuations. So, currency hedging is an attempt to reduce the effect of currency fluctuations by investing in securities or assets whose value increases or decreases in relation to changes in the exchange rate.

Reason for investing in Dollar/Euro funds

One of the reasons, if not the only reason, why people would like to invest in Dollar funds in Nigeria should be to use them to hedge currency exchange rate risks. In the various prospectuses and advertorials, the investment managers tell investors of the beauty of the Dollar funds as a means to achieve currency diversification, guide against devaluation and of course, make some good returns.

According to Stanbic IBTC, “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 of Nigeria.”

In support of their Nigeria Dollar Income fund, Chapel Hill Denham says, “The Fund provides unitholders an opportunity to invest in US dollar-denominated securities while also ensuring diversification of portfolio against devaluation of the domestic currency. The Fund proceeds will be applied towards investment in Eurobonds, money market instruments and foreign equities.”

In the same way, Cordros Asset Management Company has this to say about its Dollar fund, “The Cordros Dollar Fund is a mutual fund that allows you to conveniently invest and earn returns in US Dollars. The fund invests in US Dollar-denominated securities like Sovereign Eurobonds, Corporate Eurobonds, Money Market instruments and other quoted Corporate Eurobonds. The objective is to offer you competitive returns than is obtainable from an average domiciliary bank account.

The Nigerian Mutual fund market is replete with Dollar and Euro funds that investors could use as an antidote or a hedge against currency exchange risk. Here is the list of Dollar/Euro Funds in Nigeria.

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