- Co-Head of Multi-Asset Platform
Switzerland, Intermediary
ChangeThe views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
Last year, there were many large moves in currencies — not just in the US dollar but in the Japanese yen, the Australian dollar, and the British pound, among others. We expect that higher currency volatility will remain in place in 2023, spurred on by elevated levels of economic and asset price volatility, as well as divergence in countries’ policies, cycles, and inflation challenges. The impact of government intervention in currency markets also bears watching.
All of this suggests that currency risk within portfolios may be elevated relative to recent experience — perhaps even occasionally overwhelming the impact of fundamental views on companies. Volatility and dispersion could also create opportunities to generate alpha through active currency management. The bottom line is that it may be time for a fresh look at the impact of currency on portfolio construction.
Weighing different hedging approaches and their pros and cons
As a starting point, investors should be aware of the underlying currency exposures within their equity and fixed income allocations. Those insights will help sharpen the focus on specific currency approaches, which include:
- Structural approaches — Fully hedge all currency exposure regardless of the market outlook or leave all currency exposure fully unhedged.
- Asset-class-based approaches — Make specific currency-hedging decisions for each underlying asset class in a portfolio.
- Optimal hedge-ratio approach — Hedge a percentage of the currency exposure to minimize portfolio volatility.
- Risk-premia harvesting — Leave all positive-carry currency exposure (e.g., those currencies from countries with higher interest rates than the home country) unhedged.
- Active management — Make currency exposure an active decision based on the outlook for the respective currency.
Of course, each approach brings with it certain trade-offs. Figure 1 illustrates the different levels of both operational and investment complexity involved in various currency-hedging strategies:
Operational complexity — Currency hedging introduces operational complexity, not just at initiation but also to maintain hedges through currency forward rolls. This is highest for hedging processes that require constant change, including active management and premia harvesting.
Investment complexity — Currency hedging can have a range of effects on investment complexity. Fully hedging currency effectively eliminates the impact of currency variations on portfolio returns. A fully unhedged approach exposes the portfolio to the impacts of currency movement, which can be either diversifying or volatility enhancing depending on the nature of each investor’s home currency and underlying portfolio currency exposures. Active currency management involves higher levels of complexity. Asset-class hedging can be a middle ground. For example, some investors prefer to hedge fixed income currency exposures given the larger proportional impact of currency volatility on fixed income relative to equity portfolios.
Figure 1
Take a deeper dive on market volatility and asset allocation
Currency markets aren’t the only area where volatility is elevated. Our 2023 Outlook offers a wide range of views from our iStrat Team on economic and market conditions and the asset allocation implications, including inflation hedging, downside mitigation, and factor-based insights for volatile, sometimes directionless markets.
Expert
Related insights
Showing
of
Insights Posts
“Goldilocks” and the three drivers of hedge fund outperformance
Continue reading
15
min
Whitepaper
2026-11-30
Impact measurement and management: addressing key challenges
Continue reading
5
min
Article
2025-10-31
URL References
Related Insights
Stay up to date with the latest market insights and our point of view.
Read next
Showing
of
Insights Posts
“Goldilocks” and the three drivers of hedge fund outperformance
Members of our Investment Strategy & Solutions Group explain why shifting economic conditions may bode well for hedge funds broadly but also see reasons that manager selection may be more important than ever.
15
min
Whitepaper
2026-11-30
What do the US election results mean for investors?
The US election results could have significant implications for the global economy and capital markets. Our panel of experts provides a thorough analysis of what happened and explores potential market impacts.
Video
2025-11-30
Monthly Asset Allocation Outlook
Wondering how to reposition your portfolio amid election-related uncertainty? Explore the latest monthly snapshot of our Multi-Asset Team’s asset class views.
5
min
Article
2025-11-30
Impact measurement and management: addressing key challenges
Our IMM practice leader describes common impact investing challenges and suggests ways to overcome them.
5
min
Article
2025-10-31
Take it “ease”-y
Tim Antonelli, Head of Multi-Asset Strategy – Insurance and Portfolio Manager, explains why he thinks insurers should consider locking in current yields and sticking with global equity exposure.
18
min
Article
2025-10-31
US election special: which investment themes win at the polls?
The upcoming US election could be one of the most momentous in recent history. How could the result affect different investment themes? Our thematic team investigate the potential implications for investors.
7
min
Article
2025-10-31
Sahm rules are meant to be broken
Fed easing is finally here and fundamentals remain favorable. But what about that election? Members of our Investment Strategy & Solutions Group offer their outlook, including their latest views on equities, bonds, and commodities.
12
min
Article
2025-10-31
Chart in Focus: What does the rate cut mean for equities and bonds?
Are rate cuts positive? On the heels of the much-anticipated initial Fed cut, in this article we look to historic precedent for where the markets could go in the coming months.
3
min
Article
2025-09-30
The US elections through the eyes of a European investor
Supriya Menon, Head of Multi-Asset Strategy – EMEA, explores what potentially material implications upcoming US elections could have for European investors and identifies key areas to monitor closely.
7
min
Article
2025-09-30
Picture this: Our forecast in 7 charts
What should investors expect for the remainder of 2024? View a visual summary of our Investment Outlook in seven compelling charts.
10
min
Infographic
2025-09-30
Four investment perspectives amid a pivotal US election
How can investors reposition portfolios for a pivotal but highly unpredictable US elections? Nick Samouilhan explores potential avenues in conversation with three leading portfolio managers.
6
min
Article
2025-09-30
URL References
Related Insights