Is forex hedging just a mug's game?

Peter Elston, chief investment officer at Seneca Investment Managers, investigates the pros and cons of forex hedging.

The expected return on forex exposure is very low. If your base currency is pound sterling and you invest, say, 10% of the portfolio in US dollars, what you might gain in higher interest rates would in theory be lost in the accompanying higher inflation that would result in depreciation of the currency - a zero sum game. However, in practice, exchange rates do not just follow real interest rate differentials. They are much more volatile. So you do not get any increased return but you get a big increase in volatility. That is why, in my humble opinion, forex exposure is a mug's game. ...