Currency Strategy
This page sets the decision framework for managing NZD/USD exposure across the portfolio. The default position is to remain mostly unhedged and only add hedging when the New Zealand dollar becomes unusually strong.
The family lives and spends in NZD, but the portfolio is intentionally invested mostly in global equities. That creates short-term FX volatility in reported NZD wealth, but it has also been a material tailwind when the NZD is weak.
Current Exposure
- Liquid portfolio: $5.51M NZD
- Explicitly hedged: $0 (0%) — all unhedged per policy
- Effectively unhedged foreign exposure: ~$5.51M (100%)
- Current NZD/USD: 0.5844
- 10-year NZD/USD range: roughly 0.55 to 0.75
The practical reality is simple:
- A weaker NZD increases the NZD value of USD assets.
- A stronger NZD reduces the NZD value of USD assets.
- Over long horizons, that volatility is accepted as part of owning global equities unhedged.
FX Sensitivity
The table below assumes asset prices do not move and only NZD/USD changes.
| NZD/USD | Approx NZD value of unhedged assets | Change vs today |
|---|---|---|
| 0.55 | $5.71M | +$336K |
| 0.60 | $5.24M | -$140K |
| 0.65 | $4.84M | -$543K |
| 0.70 | $4.49M | -$888K |
| 0.75 | $4.19M | -$1.19M |
Decision Framework
| NZD/USD Range | Stance | Action | Rationale |
|---|---|---|---|
| < 0.55 | Very weak NZD | Stay unhedged | NZD is already near the weak end of the 10-year range. Hedging here would likely lock in a poor conversion rate and reduce upside if NZD stays weak only temporarily. |
| 0.55 - 0.65 | Normal range | Stay unhedged (current) | This is the accepted base case. FX moves will create noise in NZD net worth, but hedging costs are not justified over a 10-25 year horizon. |
| 0.65 - 0.70 | NZD strengthening | Consider 20% hedge | At this point some NZD gains are worth protecting, but only with a partial hedge. The default remains mostly unhedged. |
| > 0.70 | Strong NZD | Increase to 30-40% hedge | The NZD is approaching the strong end of the historical range. A tactical hedge becomes more attractive as protection against mean reversion back down. |
| > 0.75 | Extremely strong | Review entire FX strategy | This would be a major regime move. Reassess not only hedge levels, but also contribution policy, rebalancing, and whether the FX backdrop has structurally changed. |
Action Rules
- Do not act on a one-day spike. A threshold should be considered triggered only if NZD/USD holds above it for at least 30 days.
- Implement hedging in 2-3 tranches, not one trade, to reduce timing risk.
- Use hedging as a risk-management overlay, not a market-timing strategy.
- If NZD falls back into the 0.55-0.65 range, allow the hedge to drift down over time rather than rapidly reversing it.
Cost of Hedging Analysis
Fund Fee Difference
For the main Kernel equity pairs, the published management fee is the same for hedged and unhedged versions:
| Kernel fund pair | Unhedged fee | Hedged fee | Fee difference |
|---|---|---|---|
| S&P 500 | 0.25% | 0.25% | 0.00% |
| Global 100 | 0.25% | 0.25% | 0.00% |
That means the cost of hedging is not mainly a higher headline fund fee. The real cost is the embedded currency hedge carry and roll cost.
Expected Hedging Drag
For a New Zealand investor hedging USD assets back to NZD, the historical drag has often been around 1-2% per year. That cost varies over time, but over long horizons it is material.
Recent Kernel performance differences show how large the gap can become when the NZD weakens and unhedged investors benefit:
| Fund pair | 5-year annualised index return | Hedged vs unhedged gap |
|---|---|---|
| S&P 500 (Unhedged 17.71% vs Hedged 11.68%) | 6.03% p.a. | Mostly FX outcome, not just hedge cost |
| Global 100 (Unhedged 21.29% vs Hedged 16.29%) | 5.00% p.a. | Mostly FX outcome, not just hedge cost |
| World ex-US (Unhedged 13.82% vs Hedged 12.99%) | 0.83% p.a. | Smaller recent FX effect |
| Global Infrastructure (Unhedged 14.14% vs Hedged 9.83%) | 4.31% p.a. | Large recent FX effect |
These historical gaps are not a forecast. They simply show that over the recent period, being unhedged was strongly rewarded because NZD weakened.
Break-even Logic
Hedging only pays off if NZD strengthens by more than the hedge cost over the period you hold the hedge.
| Hedge level | Estimated portfolio drag if hedge cost is 1-2% p.a. | NZD strengthening needed to break even |
|---|---|---|
| 20% hedge | 0.2-0.4% p.a. | More than 0.2-0.4% on total portfolio |
| 30% hedge | 0.3-0.6% p.a. | More than 0.3-0.6% on total portfolio |
| 40% hedge | 0.4-0.8% p.a. | More than 0.4-0.8% on total portfolio |
| 100% hedge | 1.0-2.0% p.a. | More than 1.0-2.0% on total portfolio |
That is why the default policy is to stay unhedged until NZD reaches unusually strong levels.
Practical Implementation
Kernel Hedged Options
Kernel currently offers NZD-hedged versions of several global funds that can be used if a tactical hedge is warranted:
- S&P 500 (NZD Hedged)
- Global 100 (NZD Hedged)
- World ex-US (NZD Hedged)
- Global Infrastructure (NZD Hedged)
- Global Property (NZD Hedged)
- Global ESG (NZD Hedged)
For the current portfolio, the most practical hedge levers are the funds already held in unhedged form with direct hedged equivalents:
- S&P 500
- Global 100
- World ex-US
- Global Infrastructure
There does not appear to be a direct NZD-hedged equivalent for Emerging Markets or S&P Global Dividend Aristocrats in the current Kernel lineup, so those positions are less flexible from an FX-management perspective.
How to Implement
If the threshold is triggered, switch a defined percentage of existing unhedged holdings into the hedged equivalents.
| Target hedge | Total hedged amount needed | Additional amount to switch from today |
|---|---|---|
| 20% | $1.10M | about $971K |
| 30% | $1.65M | about $1.52M |
| 40% | $2.20M | about $2.07M |
Suggested order of implementation:
- Switch S&P 500 (Unhedged) to S&P 500 (NZD Hedged).
- Switch Global 100 to Global 100 (NZD Hedged).
- If more hedge is needed, use World ex-US and Global Infrastructure hedged options.
- Leave the remaining portfolio unhedged unless NZD moves into the >0.70 zone for a sustained period.
Settlement and Timing
- Kernel transactions are not instantaneous. Switching between funds involves normal processing and settlement delays.
- That makes hedging a deliberate allocation decision, not a short-term trading tool.
- Because timing is imprecise, the right approach is to act only at clear valuation extremes and accept a few days of market and FX movement during the switch.
Historical Context
Useful references:
Approximate context for the last decade:
| Period | NZD/USD area | What it meant for an unhedged NZ investor |
|---|---|---|
| 2020 shock | ~0.55-0.60 | USD strength cushioned the NZD value of global assets |
| 2021-2022 strength | ~0.70-0.73 | NZD strength would have reduced reported NZD wealth materially |
| 2025-2026 current area | ~0.58-0.59 | Near the weak end of the range, which favours staying unhedged |
If today's unhedged exposure were repriced at those stronger 2021-2022 levels, the NZD value would be roughly $0.9M-$1.1M lower than it is today.
Key Principle
Over 10-25 year horizons, currency hedging typically costs more than it saves for NZ investors in global equities. We accept FX volatility as the price of unhedged returns. Action only warranted at extreme levels.