This prompts the question: should you hedge foreign currency exposure, removing the effects of exchange rate movements altogether? Or should you seek to turn it to your advantage? We present seven essential tips to help answer these questions.
Hedging Your Exposure
In some years, hedging a portfolio’s exposure to foreign currencies would have boosted returns significantly. For example, in 2009, a strong post financial crisis rebound in global equity markets saw international shares rise by 26% for the year* (as measured by the MSCI World ex-Australia index, before allowing for exchange rate movements). But a strong rebound in the Australian dollar meant that an unhedged investor would have done well to break even1 on international shares after allowing for exchange rate movements. As a result, in 2009 hedging would have boosted returns by around 27%.2
Hedging can also detract from returns. In 2013 international shares had another strong year, rising 29%3 (before allowing for exchange rate movements). But a falling Australian dollar turned an impressive 29% return into an astounding 48% gain4 for unhedged Australian investors. In 2013, hedging would have cost over 15% in performance.