Should Investors Avoid or Seek Out Currency Risk? How to Resolve a Long-Standing Puzzle
18 Pages Posted: 1 Dec 2017
Date Written: November 29, 2014
The question of how to manage currency risk in institutional portfolios has been controversial since the modern surge in global investing started to take root in the 1970s. Fund managers tend to hedge some or all of their embedded currency exposure, but few pursue currency returns separately with a specially designed currency investment plan. In this paper, we argue that institutional investors ought to hedge a larger portion, and logically all, of the currency exposure in their underlying assets and then make use of the resulting portfolio risk reduction to engage in purposeful currency investing designed to produce alpha- and beta-style returns that are largely uncorrelated with traditional risky assets.
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