The Dollar Index (DXY) just recorded the 3rd strongest nine month move back to 1967. It appreciated 23.3% from July 2014 to March 2015. In a few short quarters investors have forgotten about the persistent 50 year weakening of the dollar, shown below. The recent move appears on first glance to bear the distinction of being the lone cyclical strengthening which occurred PRIOR to an actual Fed Funds rate hike. One could easily argue, however, that the tapering of quantitative easing served as the de facto rate "hike".

Meanwhile, investors slammed the barn door after the herd expeditiously exited. $33 billion has been plowed into currency hedged equity ETF's this year under the auspice that Fed tightening will lead to continued dollar strength. Hindsight bias is quite powerful with moves of this magnitude.

For the purposes of this article, I will speak solely to hedging equity exposure. Hedging a stream of cash flows from fixed income investments is another animal entirely. That being said, the term "hedging" itself is a misnomer. Currency hedging, in its simplest form, is a bet that foreign currencies will decline relative to the investor's home currency. Hedging makes a lot more sense for corporations whose businesses generate a steady stream of income from a foreign jurisdiction. It makes much less sense for a U.S. equity investor.

Globalization is a very real trend. As the percentage of non-U.S. revenues for S&P 500 companies has grown to 46%, the correlation of returns for dollar denominated investors between the S&P 500 and MSCI EAFE Index have converged at upwards of 0.9 (2014 being a welcome, and notable, exception). Corporations have sophisticated hedging mechanisms underlying their businesses to adjust for revenue generation abroad. It makes little sense that an investor should hedge on top of a hedge.

Further, a review of historical Fed tightenings over the last 30 years reveals the recent interest in equity hedging activities may be misguided. There are six distinct tightening cycles over the last three decades when the FOMC increased the Fed Funds rate. Below is a chart which tracks the movement of DXY in the 12 months prior to, and 24 months after, the conclusion of the rate hike cycle. As you can see, the movement of DXY is a mixed bag. On average, in the 24 months following the conclusion of the tightening, the dollar has actually depreciated by 5.5%.

Understand the underlying exposures. Review the historical precedent. Hedge foreign currencies at your own risk.