Currency-hedged return
What is Currency-hedged return?
Currency-hedged return is the portfolio return after using instruments or structures intended to reduce selected foreign-exchange exposure.
Reporting should attribute local asset return, spot currency movement, hedge carry, hedge market movement, transaction cost, collateral, tax, and residual exposure separately. Comparing a live hedged share class with an unhedged index requires aligned fees, hedge ratio, rebalance frequency, and valuation timestamps.
Residual differences can remain because exposure changes between rebalances and hedges rarely match every cash flow exactly.
Cash-flow timing and market holidays should remain visible when explaining every material residual return and tracking error clearly.
Return components
A hedged return combines local asset return, residual spot exposure, forward or derivative return, carry, trading cost, collateral, and fees. It is not simply local return. Forward pricing reflects interest differentials, and hedge gains or losses can arrive on different dates from asset valuation, creating cash and attribution effects.
Hedge ratio
A 100% target hedge rarely removes every currency effect because asset values move between rebalances, income and flows occur, and underlying companies have economic FX exposure. Partial hedges retain deliberate currency risk. Ratio, rebalance frequency, tolerance, exposure basis, and treatment of cash determine actual outcome.
Hedged share classes
Funds can offer hedged classes that manage class-currency exposure against portfolio currencies. The hedge applies at class level and does not necessarily neutralize every underlying company exposure. Different classes can vary in fees, launch dates, distribution, and hedge implementation. A currency label is not a guarantee of zero FX movement.
When hedging helps
Hedging reduces currency-driven volatility when foreign currency moves against the investor, but gives up gains when it strengthens. For bonds, currency volatility can dominate underlying risk, making hedging common. Equity decisions depend on horizon, liabilities, diversification, cost, and policy. Hedge value should be evaluated against objectives, not recent currency direction.
Practical comparison
Align asset universe, hedge benchmark, ratio, roll, pricing, fee, and tax. Attribute spot, carry, cost, and residuals. Use actual historical forward curves rather than a constant spread. Avoid comparing a hedged fund's NAV with an unhedged price index or describing hedge profit as manager alpha when it offsets currency loss.
Sources and further reading
- Currency Management: An Introduction, CFA Institute