The time I tried to hedge the rand
In early December 2015, South Africa suffered downgrades by two credit-ratings agencies. Fitch reduced its rating to just above junk status, and Standard and Poor’s moved its outlook from stable to negative.
Unemployment was above 25%, and the economy was barely growing.
Thursday 10 December 2015
The radio was abuzz with the unbelievably shocking news item of the day.
President Jacob Zuma had, the evening before, unceremoniously fired the finance minister, Nhlanhla Nene, and had replaced him with an unknown, unqualified “backbencher” — David van Rooyen.
The rand fell to below 15 to the dollar, and stock prices went into freefall as trading began.
This shook me to my core.
For some reason, all the previous scares, scandals and controversies had never impacted me. Perhaps it was because I was no longer single with limited responsibility. I was a husband, and father of two. This felt momentous; this felt like something the country would not be able to recover from.
Over the next few weeks, after serious contemplation, my wife and I decided that it was time for us to get out.
After deciding we were leaving, we needed an exit strategy. With such volatility in the exchange rate, how could we get out what we can, without risking losing a significant portion due to other poor political decisions?
During my studies, I had learned the basics of economics and finance, extending to derivatives.
I was not confident at all that I would be able to hedge the rand until our departure, so I enlisted the help of a good friend, and banker to make sure I could pull it off. After all, the best way to learn is to do!
After an initial meeting at his offices, we agreed that I wasn’t trying to game the system and benefit from the likely downward swing of the currency. Instead, I was attempting a hedge.
I would place 50% of my capital in a dollar futures contract and retain the other 50% in rands.
We spent a fair amount of time discussing all the ins and outs of the process, and he warned me to get ready for some possible margin calls.
Although I had learned this at a theoretical level, I had never actually done anything other than vanilla trading. It was going to be my only shot at trying to get it right.
We signed all the papers, shook hands, and I left to make the transfers.
Unbeknownst to me, I had awakened all my inner insecurities through this process.
Through the weeks that followed, I closely tracked the radio, online papers and social media.
Every change in the rand, however minuscule, caused me either immense pain or joy.
The government quickly reacted to public (local and international) outrage. It promptly replaced David van Rooyen with a more seasoned minister, Pravin Gordhan.
At about this time, I started getting margin calls since the rand was recovering.
Every. Single. Day.
While I had budgeted for these, I was freaking out that I had made a massive mistake!
I started to panic.
In consultation with my investment advisor, we agreed that I should take a deep breath, and re-think what I wanted to get out of the whole trade. I was not in this to make money, but rather to preserve what I had.
Due to this, he recommended that I should pay less attention to the movements of the currency, and instead focus on my imminent departure.
But I couldn’t.
Close! Close! Close!
I received what felt like the hundredth margin call early one morning. I made the required transfer and opened my trusty Excel sheet to calculate what my position would be if I closed it out.
It wasn’t pretty.
My pessimism on the rand had proven to be unwarranted this time; it was recovering at an impressive rate.
I picked up the phone and closed my position.
Packing to leave
As things settled down, we ordered our container, sold our house, and finalised our paperwork for our emigration.
While this attempt had not gone according to plan, what I learned in the process was invaluable. Once we landed and settled into a routine, we were able to start again, saving and investing in more traditional financial instruments.
Although margin calls are a thing of the past, I have learned that I need to take a step back from the noise of day to day movements in investments, and stay focussed on the long term gameplan.
Gone are the days of me logging in incessantly to see the performance of the different indices, celebrating the small upticks, and mourning the small losses. I have even gone so far as to delete the financial tracking applications off of my phone.
In 2015/2016, all signs indicated that the rand was to depreciate further. Yet it rebounded.
Some say that the rand had different effects already priced in, and therefore was not likely to decline more. Others were as dumbfounded as I was. This confusion points to the fact that there is no way to reduce complex economic forces to a single outcome by merely looking at the front page of the newspapers.
Even South African Airways (SAA) discovered this in 2001 when they lost approximately $ 500 m due to a lousy hedging move.
Because of this, by and large, I now take the view that playing the forex game is a fool’s errand.
As always, if you like what you read, you can subscribe here.