To Hedge or Not to Hedge : Assessing Currency Management Solutions for International Equity Portfolios

The decision to manage currencies in international equity portfolios is a complex one, and is intrinsically related to the final objective of the investor, whether it is risk reduction, or improvement in risk adjusted returns. In the absence of a confident view on the direction of foreign currency, a risk averse investor might choose to just hedge the currency exposure of her portfolios. On the other hand, there are well documented risk premia within the broader currency market that offer positive expected returns. An active investor can benefit from such risk premia and use currencies as a source of portable alpha to generate additional source of risk adjusted returns, above and beyond what a hedged equity portfolio could provide