As history has shown, making currency-hedging decisions at the asset level rather than at the portfolio level can have disastrous consequences.
Currency-hedging decisions should take into consideration factors such as investment time horizon, asset mix, and risk preference, among others. In other words, the hedging strategy must follow the portfolio’s strategic asset allocation. For example, fixed income portfolios should be hedged to local currency. Without this, the volatility of currencies in international bonds can offset the diversification benefits. On the other hand, when investing in foreign equities, adopting a systemic approach to currency hedging is necessary. This may include hedging with currency futures and, over longer-term horizons, passive hedging strategies that rely on currency trends, valuations and global interest-rate differentials.