What should investors consider when currency hedging?

Growing cost for European investors

Alessandro Marolda, senior consultant of the Portfolio Research & Consulting Group at Natixis Investment Managers, looks at the growing cost of hedging for sterling and euro-based investors buying US dollar-denominated assets.

One of the biggest asset allocation themes this year has been the large and growing cost of hedging for European investors buying US dollar-denominated assets. This has affected mainly EUR-based investors but the burden on sterling investors is also starting to grow. This is mainly due to the US Federal Reserve raising interest rates while European central banks have remained on hold. The larger the interest rate differential between two currencies the higher the cost of hedging. For example, if interest rates in sterling are 0.5% and interest rates in US dollar are 2.0%, ceteris pari...