Rand Hedge as an Investment Strategy on the JSE

Abstract

This study examines the performance of Rand Hedge shares on the Johannesburg Stock Exchange (JSE) and investigates the impact of fluctuations in the dollar-Rand exchange rate (hereafter USDZAR) using a risk-based framework. The exchange rate beta is used as the sole determinant for classifying shares into three portfolios namely, Rand Hedge, Rand Neutral and Rand Tracker. Over the period January 1996 to December 2013, Rand Hedge shares typically underperformed Rand Neutral and Rand Tracker shares. Therefore, from a pure investment perspective, a Rand Hedge investment strategy does not offer significant alpha. However, the results of the time series regressions and vector auto-regression (VAR) analysis indicate that Rand Hedge shares hedge against exchange rate shocks and significant Rand depreciations. As a result, Rand Hedge shares offer investors protection from currency-induced tail-risk, thereby mitigating extreme currency devaluations. This suggests that the pattern of returns realised by the Rand Hedge portfolio are driven by a currency specific risk factor.