Portfolio strategies for hedging against rand weakness

Abstract

This paper considers how portfolios may be structured which provide protection against Rand exchange rate movement and, in particular, against Rand weakness. Two portfolio optimisation methods are used to estimate the portfolio weights of the Top 40 shares listed on the Johannesburg Stock Exchange (JSE) which provide the maximum protection against some pre-defined expectation of Rand weakness. The performance of these Rand-hedge portfolios is then compared to that of the Itrix FTSE 100 Exchange Traded fund (ETF) which mimics the London-based FTSE 100. While the portfolios based on the JSE Top 40 components provide slightly less Rand hedge protection than the Itrix FTSE 100 ETF, they are still able to provide a very effective exchange rate hedge. Moreover, they are also able to provide greater exposure to the South African market and this has resulted in a significant performance advantage over the Itrix FTSE 100 over the last five years.