To hedge or not to hedge, that is the question

For most alternative assets and strategies, standard industry practice has been to remove currency exposure because, when employing pure skills-based strategies, currency hedging allows the manager’s pure alpha to be assessed and used appropriately without the impact of currency volatility on returns. (Note that this should not be confused with alternative strategies such as global macro that employ currency trading as a source of alpha.) As the primary aim of alternative investments is usually to generate absolute returns, removing currency volatility makes sense.

TAILORED STRATEGIES

There are many areas that an Australian-based investor should focus on when considering a currency strategy for a diversified portfolio; and there is no blanket rule that can be applied to all investors.

As Australian investors, we have been forced by necessity to understand and appropriately manage currency exposures in portfolios, since not investing in offshore assets would be to simply ignore the basic principles of diversification. We all recognise the strong returns of Australian-based assets over the past 20 years, but also understand that this outperformance cannot necessarily continue. Therefore, advisers need to understand all aspects of currency management in order to develop specific strategies for each individual investor.

Paul O’Connor is a director of Standard & Poor’s Wealth Management Services