WisdomTree & Currency Hedging · FOR FINANCIAL PROFESSIONAL USE ONLY. Myth of Currency Hedging: It...

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


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


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)


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


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)


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%


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


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


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


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


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


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%


Cu

mu

lati

ve R

etu

rn

He

dge

Rat

io

JPY Exposure


-40%

-20%

0%

20%

40%

0%

20%

40%

60%

80%

100%


Cu

mu

lati

ve R

etu

rn

He

dge

Ra

tio

MSCI EAFE


-60%

-40%

-20%

0%

20%

40%

0%

20%

40%

60%

80%

100%


Cu

mu

lati

ve R

etu

rn

He

dge

Rat

io

GBP Exposure



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%


Cu

mu

lati

ve R

etu

rn

JPY Exposure



-100%

-50%

0%

50%

100%


Cu

mu

lati

ve R

etu

rn

CHF Exposure



-60%

-40%

-20%

0%

20%


Cu

mu

lati

ve r

etu

rns

GBP Exposure




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%


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)


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%


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%


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%


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


-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


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


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


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

nu

al G

ross

Ove

rlay

/He

dgi

ng

Re

turn

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


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

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OverlayLocal Returns

Annualized Returns


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Performance of MSCI Japan Index with Overlay

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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%



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Performance of MSCI EAFE Index with Overlay

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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%


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%


Annualized Returns


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Currency Impact Can Also Influence Different

Types of U.S. Equities

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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.


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.

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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.


Geographic Revenue Illustrates Strong Contrast

Between the Indexes

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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.


Relative Weight Differentials in Strong Dollar /

Weak Dollar Indexes

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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


Thinking about Currency’s Impact on Emerging

Market Equities

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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.


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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WisdomTree & Currency Hedging · FOR FINANCIAL PROFESSIONAL USE ONLY. Myth of Currency Hedging: It...

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Transcript of WisdomTree & Currency Hedging · FOR FINANCIAL PROFESSIONAL USE ONLY. Myth of Currency Hedging: It...