How Currency Hedging Can Reduce Risk

Hedging against currency moves reduces risk in the long-term, but it is a more expensive option for fund investors

Daniel Sotiroff 29 October, 2018 | 10:22AM

US dollar and euro currencies

Funds that hedge their currency risk can be an effective long-term strategy for investors, but achieving this lower volatility can create additional costs.

When investors purchase a foreign investment, they must first convert their home currency to foreign currency. Thus, after completing a transaction, they are exposed not only to the risks of the foreign asset, but also to changes in the value of the foreign currency. This increases overall risk, and these two risks aren’t simply additive.

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About Author

Daniel Sotiroff  is an analyst, passive strategies research, for Morningstar

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