Currency hedging in a fund is not the same thing as trading a currency

explainerPublished 19 October 20262 min readcurrencies

Key points

• The fund’s base currency, the assets’ currencies and the investor’s home currency can be three different things.
• A hedge changes the currency result. It does not change the assets’ own losses.
• The exchange rates below are hypothetical.

What is going on

An unhedged holder of euro assets, reporting in dollars, gains when the euro strengthens against the dollar and loses when it weakens, on top of whatever the assets did in euro. A hedged class sells the euro forward against the dollar, or the other way around depending on the class. The forward points reflect the interest differential. They are not a forecast this desk will invent. The retail foreign-exchange note on this site keeps a broker contract apart from the BIS dealer survey. A hedged fund share is a third object.

Why it matters

Suppose, as an illustration only, that one euro buys 1.10 dollars at the start and 1.00 dollars at the end, and that a euro asset stays at 100 euros. The dollar value goes from 110 to 100, a fall of about 9 percent, with no change in the asset’s euro price. A perfect hedge would have offset that translation and left the costs of the hedge. A real hedge is not perfect: it is reset, it has a spread, and the interest differential can be a gain or a cost. These rates were not taken from a market.

What to watch

Read the share-class name. ‘USD’ can mean the listing currency rather than a hedge. Check the hedging policy, the hedge ratio and the costs. The forex position calculator sizes a currency position you describe. It does not hedge a fund for you.

Risks

Hedging the currency and keeping a falling asset still loses the asset return. Leaving a currency unhedged can help or hurt. Interest differentials can make a hedge expensive for a long period. This is not advice to hedge or not to hedge.