- Co-Head of Multi-Asset Platform
United States, Intermediary
Change
The 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
URL References
Related Insights
Stay up to date with the latest market insights and our point of view.
Read next
Showing
of
Insights Posts
Concentrated markets: Implications for active management, manager research, and multi-manager capital allocation
Members of our Fundamental Factor Team share research insights on the portfolio impact of benchmark concentration and highlight tools that may help, including extension strategies, passive-share analysis, and index-completion approaches.
18
min
Article
2025-12-31
Scaling opportunities in a new economic era
Explore our latest views on risks and opportunities across the global capital markets.
Article
2025-12-31
A guide to investing in the age of anxiety
There's a long list of issues worrying asset owners, from geopolitical risk to high valuations. To help, Head of Multi-Asset Strategy Adam Berger offers coping tips for an uncomfortable investment backdrop and a world where investing rules of thumb may be broken.
15
min
Article
2025-12-01
Trump 2.0: Time to curb your enthusiasm?
How does an allocator navigate markets when so much about the policy landscape is unknown? Our Investment Strategy & Solutions Group offers their views on the new political realities in the US and their global implications, including for equities, bonds, and commodities.
12
min
Article
2025-12-31
Equity Market Outlook
In our Equity Market Outlook, we offer a range of fundamental, factor, and sector insights.
Article
2025-12-31
Time to get active? 5 equity investment ideas for 2025
As we head into 2025, growth seems poised to accelerate, especially in the US. Equity Strategist Andrew Heiskell and Macro Strategist Nicolas Wylenzek see five themes that may create opportunity across global equity markets.
10
min
Article
2025-12-31
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.
4
min
Article
2025-12-31
Is your portfolio keeping pace with the changed outlook?
It's been an uncertain few years for investors, but looking ahead, we believe investors can expect a resilient economy, a solid outlook for growth and a positive environment for risk assets. What does a changed outlook mean for investors?
8
min
Article
2025-12-31
Don’t let recency bias get in the way of good investment ideas
Tim Antonelli, Head of Multi-Asset Strategy – Insurance, offers ideas to help insurers avoid being anchored to recent events and build portfolio resilience, from locking in higher yields to taking a more dynamic approach with surplus assets.
14
min
Article
2025-11-30
Chart in Focus: Is the “Trump trade” real?
Is this "Trump trade" real？In this latest edition of Chart in Focus, we compare market's reactions to Trump's re-election and his 2016 election, and share our observations.
3
min
Article
2025-11-29
“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
URL References
Related Insights
Equity Market Outlook
Continue readingBy
Andrew Heiskell
Nicolas Wylenzek