Hedging currency systematically

CURRENCIES

Andrew Walsh, head of ETF sales UK and Ireland at UBS Global Asset Management, explains how a transparent hedging strategy can reduce currency risk and optimise portfolio returns.

Investors in international equity ETFs are exposed to two main risks. Firstly, the direction of the equity market in which they have chosen to invest; and then the foreign currency exposure which is often a by-product of an equity bet, but which has the potential to derail returns. Without any currency hedging in place at all, investors are taking an implicit bet on the foreign currency strengthening, which may or may not be consistent with their macroeconomic view. To illustrate the extent to which currency movements can impact returns; a local Japanese investor holding the Nikkei 225 f...