In April, MSCI Barra issued a research report: Currency hedging: a free lunch? This immediately reminded me of the mantra one of my old brokers repeated whenever I met him for lunch: "No biz, no fizz." In other words, as we all know and as I used to say, you don’t get nuffing for nuffing. The report is well researched but ultimately somewhat simplistic. So much so, that I was moved to ask if it should be subtitled: Stating the bleeding obvious. In effect, it says that if you hedge, you might increase your risk and might not make as much money as if you didn’t.
Discovery
Here is one of the things the analysis apparently discovered: "Our results do not support the ‘free lunch’ as stated by Perold and Schulman (1988). We examined our data to determine the frequency of free lunches starting with a definition of a free lunch as a case in which the Percent of Total Risk was negative and the information ratio was positive. For the period 1987 to 2008, we then calculated the proportion of time for which there was no free lunch. Table 7 presents the results and demonstrates for most cases, the vast majority was characterized by highly infrequent free lunches."