Currency Hedging

Abstract

Investing in foreign assets can improve the diversification profile of U.S. institutional investors, but this comes at the expense of introducing currency risk to a portfolio. Given that currency returns are volatile and difficult to predict, many investors consider implementing currency-hedging programs to reduce or eliminate the volatility that results from foreign currency exposures.

This paper examines the prospect of hedging currency risk, evaluating the different methods used to established hedges and types of currency management overlay programs, as well as the historical risk, returns and costs of hedging developed market and emerging market currency exposures.

Meketa Investment Group recommends investors evaluate their currency hedging decisions from a total portfolio perspective that incorporates portfolio-wide exposure, hedging costs, and volatility and return targets.

Keywords: currency, hedging, "institutional investors", "currency risk", "foreign currency"

JEL Classification: G15